Henkel Annual Report 2006 1 Preface

Annual Report 2006 Financial Highlights

Annual Report 2006 Henkel Group: Financial Highlights Henkel

in million euros 2005 2006 +/– Sales 11,974 12,740 6.4 % Operating profit (EBIT) 1,162 1,298 11.7 % Return on sales (EBIT) in % 9.7 10.2 0.5 pp Net earnings 770 871 13.1 % A World of Brands Earnings after minority interests 757 855 12.9 % Earnings per preferred share in euros 5.31 5.98 12.6 % Return on capital employed (ROCE) in % 13.3 14.5 1.2 pp Capital expenditures on property, plant and equipment 393 431 9.7 % Research and development costs 324 340 4.9 % Employees (annual average) number 51,724 51,716 – Dividend per ordinary share in euros 1.30 1.441) 10.8 % Dividend per preferred share in euros 1.36 1.501) 10.3 %

1) proposed pp = percentage points

2006 sales by business sector 2006 EBIT by business sector1)

Corporate 2 % Laundry & Laundry & Home Care 32 % Home Care 32 % Henkel Henkel Technologies 28 % Technologies 27 %

Consumer Consumer and Craftsmen Cosmetics/ and Craftsmen Cosmetics/ Adhesives 16 % Toiletries 22 % Adhesives 15 % Toiletries 26 %

1) excluding Corporate

2006 sales by region 2006 EBIT by region1) Quality from Europe/Africa/ Europe/Africa/ Middle East 63 % Middle East 69 %

Corporate 2 % Asia-Pacific 8 % North America 22 % Asia-Pacific 5 % North America 23 % Latin America 5 % Latin America 3 %

1) excluding Corporate Annual Report 2006 Financial Highlights

Annual Report 2006 Henkel Group: Financial Highlights Henkel

1) proposed pp = percentage points

2006 sales by business sector 2006 EBIT by business sector1)

Corporate 2 % Laundry & Laundry & Home Care 32 % Home Care 32 % Henkel Henkel Technologies 28 % Technologies 27 %

Consumer Consumer and Craftsmen Cosmetics/ and Craftsmen Cosmetics/ Adhesives 16 % Toiletries 22 % Adhesives 15 % Toiletries 26 %

1) excluding Corporate

2006 sales by region 2006 EBIT by region1) Quality from Europe/Africa/ Europe/Africa/ Middle East 63 % Middle East 69 %

Corporate 2 % Asia-Pacific 8 % North America 22 % Asia-Pacific 5 % North America 23 % Latin America 5 % Latin America 3 %

1) excluding Corporate Business Sectors

Business Sectors at a Glance Credits Calendar

Published by: Annual General Meeting of Henkel KGaA 2007: Laundry & Home Care Cosmetics/Toiletries Consumer and Craftsmen Henkel Technologies Henkel KGaA Monday, April 16, 2007 Adhesives 40191 Düsseldorf, Germany Leading positions worldwide Leading positions worldwide Leading our markets worldwide Leading our markets worldwide Phone: +49 (0)211/7 97-0 Publication of Report for the First Quarter 2007: Expanding our world market position from a strong Achieving profitable growth with attractive product Driving growth through innovation and acquisitions Creating added value for customers by offering © 2007 Henkel KGaA Wednesday, May 2, 2007 European and North American base innovations aligned to exacting consumer demands integrated and tailor-made solutions from an Edited by: Moving to further strengthen our positions, extensive portfolio Corporate Communications, Investor Relations Publication of Report Expanding our strong position in Europe and North particularly outside Western Europe America and selectively extending our presence in Developing new applications and growth potential for the Second Quarter 2007: the growth regions in all regions of the world English translation by: Jeanette Jennings, Wednesday, August 1, 2007 Paul Knighton Coordination: Rolf Juesten, Oliver Luckenbach, Publication of Report Key financials in million euros Key financials in million euros Key financials in million euros Key financials in million euros Dirk Neubauer for the Third Quarter 2007: 2005 2006 2005 2006 2005 2006 2005 2006 Concept and Design: Kirchhoff Consult AG, Hamburg Wednesday, November 7, 2007 Sales 4,088 4,117 Sales 2,629 2,864 Sales 1,742 1,977 Sales 3,266 3,533 Photographs: Henkel, Andreas Fechner, Wilfried Wolter Operating profit (EBIT) 433 449 Operating profit (EBIT) 321 359 Operating profit (EBIT) 185 209 Operating profit (EBIT) 345 370 Produced by: Schotte, Krefeld Fall Press and Analysts’ Conference 2007: Return on sales (EBIT) in % 10.6 10.9 Return on sales (EBIT) in % 12.2 12.5 Return on sales (EBIT) in % 10.6 10.6 Return on sales (EBIT) in % 10.6 10.5 Wednesday, November 7, 2007 Return on capital employed Return on capital employed Return on capital employed Return on capital employed Corporate Communications (ROCE) in % 13.6 15.2 (ROCE) in % 14.7 15.4 (ROCE) in % 15.6 16.9 (ROCE) in % 14.7 15.4 Phone: +49 (0)211 797-3533 Press Conference for Fiscal 2007 Fax: +49 (0)211 798-2484 and Analysts’ Conference 2008: E-mail: [email protected] Wednesday, February 27, 2008 Highlights 2006 Highlights 2006 Highlights 2006 Highlights 2006 New Products Persil with a touch of Vernel, New Products Igora Royal, Brillance Luminance, New Products Ceresit CM90 Easy Flex PLUS Tile New Products Terostat Direct Glazing Adhesives, Investor Relations Annual General Meeting of Henkel KGaA 2008: Purex Renuzit, Der General Universal Spray, Pril Diadem Rootset, Natural & Easy, Gliss Total Repair 19, Adhesive, Pattex PL 700 Assembly Adhesives Loctite 3876, P3-Neutracare 3000 series, Liofol Phone: +49 (0)211 797-3937 Monday, April 14, 2008 Funny Man, Bio Presto Sensitive, WC Frisch Wild Schauma Nutri & Shine, Taft Titane, Fa Asia Spa, Dial (FLEXTEC), Pritt Pen Roller, Loctite Super Glue Smart Cure PUR Adhesive, Macromelt 6800 series, Fax: +49 (0)211 798-2863 Kayak, Soft Scrub Cream Cleaners, Perwoll Relaunch, for Men, Theramed 2in1 3D Clean, Diadermine Lift+ Brush-on, Ceresit F158 Special Glazing Sealant for Sanicare HM 4450 E-mail: [email protected] Up-to-date facts and figures on Henkel also Vernel Aromatherapy Resculpt Self-cleaning Glass, Thomsit XXL Floor Leveling available on the Internet: www.henkel.com Compound, Pattex No More Nails Assembly Adhesive PR No.: 207 20.000 Tape ISSN: 07244738 ISBN: 978-3-923324-15-6 Responsible Care®

This publication was printed on paper from pulp bleached without chlorine and bound with Purmelt MicroEmission + 4.6 % + 4.1 % + 7.8 % + 8.9 % and Sanicare for the highest standards in occupational health and safety. The glossy cover was produced using organic sales growth organic sales growth organic sales growth organic sales growth Miracure Mboss Coating. The cover is protected by a film laminate of Adhesin laminating adhesives. The inside pages have been treated with a Miracure Gloss Coating. All product names are registered trademarks of Henkel KGaA, Düsseldorf, its affiliated companies or co-operation partners.

This document contains forward-looking statements which are based on the current estimates and assumptions made by the corporate management of Henkel KGaA. Forward-looking statements are characterized by the use of words such as expect, intend, plan, predict, assume, believe, estimate, anticipate and similar formulations. Such statements are not to be understood as in any way guaranteeing that those expectations will turn out to be accurate. Future performance and the results actually achieved by Henkel KGaA and its affiliated companies depend on a number of risks and uncertainties and may therefore differ materially from the forward-looking statements. Many of these factors are outside Henkel’s control and cannot be accurately estimated in advance, such as the future economic environment and the actions of competitors and others involved in the marketplace. Henkel neither plans nor undertakes to update any forward-looking statements. Business Sectors

Business Sectors at a Glance Credits Calendar

Quality from Henkel. Our 01 The Company 02 Preface vision is to be a leader with 06 Report of the Supervisory Board 08 Management Board brands and technologies that 10 Branding Strategy make people’s lives easier, 12 Our Top Brands 14 Innovations better and more beautiful. 16 Shares and Bonds

20 Group Management Report: The Company We research the markets and Corporate Governance analyze the needs of our 28 Group Management Report Subindex customers and consumers in 29 Group Management Report 29 Operational Activities order to utilize our insights 32 Business Performance 37 Assets and Financial Analysis in the development of new, 40 Employees high-quality products and 42 Procurement and Production 42 Research and Development superior technologies. Inno- 45 Marketing and Distribution vation is the basis for success 46 Sustainability 48 Business Sector Performance – in our World of Brands. 64 Opportunity and Risk Report 68 Outlook for the Henkel Group 69 Post-Closure Report

69 Consolidated Financial Statements Subindex 70 Consolidated Financial Statements 70 Consolidated Statement of Income 71 Consolidated Balance Sheet 72 Consolidated Cash Flow Statement 72 Notes to the Consolidated Financial Statements 117 Auditors’ Report 118 Corporate Management

122 Further Information 123 Financial Highlights by Quarter 124 Ten-Year Summary 124 Credits/Calendar

Henkel Annual Report 2006 1 Preface

We are delighted to provide you in this Annual Report with the details of another successful year for Henkel. We again succeeded in generating profitable growth while also substantially expanding our market positions.

Within a heterogeneous economic environment, our efforts on the innovation front have led to a significant increase in organic sales, and our restructuring programs have enhanced our competitiveness on the cost side.

Two primary factors had a significant influence on our markets in the year under review: first economic revival, and second further raw material price increases accompanied by a fluctuating dollar exchange rate. Against this background, we invite you to consider the facts and figures characterizing Henkel’s performance in fiscal 2006:

>> We increased sales by 6.4 percent to 12,740 million euros >> In achieving organic sales growth of 6.0 percent, we exceeded the already good growth rate of the previous year >> We improved operating profit (EBIT) by 11.7 percent to 1,298 million euros >> We were able to raise return on capital employed (ROCE) by 1.2 percentage points to 14.5 percent >> We increased earnings per preferred share from 5.31 euros to 5.98 euros, a plus of 12.6 percent >> The Management Board, the Shareholders’ Committee and the Supervisory Board will propose to the 2007 Annual General Meeting that it approve a dividend payout of 1.50 euros per preferred share and 1.44 euros per ordinary share

These achievements are a reflection of our clearly stated vision, namely to make people’s lives easier, better and more beautiful with brands and technologies, while assuming leading positions in our markets. The favorable business performance generated is also mirrored in the increase in the Henkel share price.

2 Henkel Annual Report 2006 Preface The Company

Dipl.-Ing. Albrecht Woeste Prof. Dr. Ulrich Lehner

Henkel Annual Report 2006 3 Preface

We attribute our success to the abilities and commitment of our employees. We thank all our employees for their contribution to the achievements made in fiscal 2006. We will continue investing in their training and have every confidence in their high motivation, engagement, flexibility, skills and talents going forward. As this, our 130th year of corporate history has once again shown, it is our people who, through their ability to manage change, determine our future.

During the past financial year, we intensified our efforts in the growth markets of Eastern Europe, the Middle East, Africa, Asia-Pacific and Latin America. This brought significant success with the reward of double-digit sales growth. As a result, the regions mentioned were able to increase their aggregate sales contribution in excess of the 30-percent mark for fiscal 2006. Eastern Europe and Asia-Pacific, particularly China – our new regional center is due to open in Shanghai in July – and India, will also be the focus of our growth strategy as we look forward.

Our future ability to respond in an appropriate, pro-active manner to this constantly changing world will be a key factor in the achievement of further expansion in our market positions. Innovations in our brands and processes will provide the essential platform for our continued market success. We have already achieved critical momentum in this respect by making 2006 our Year of Innovation, and we intend to continue in the same vein through 2007.

At Henkel, we are particularly committed to the principle of sustainability and are well aware of our obligations to society. In our Code of Conduct, we oblige all our employees to uphold the standards and principles that govern our business activities. Our response to infringements and violations of this Code is one of strict intolerance. Not only do we take corporate citizenship very seriously, we also ensure that our social commitment is clearly evident wherever this is expected of us as a corporation. This is very much in our own interest, as our relationships with people, and especially our customers, and their positive attitudes with respect to Henkel, serve to permanently underpin our economic success. Nowadays it is in no way sufficient to limit social responsibility to ecological issues; rather, all our business processes have to be sustainable, because only in this way can we secure the long-term interests of our shareholders. We know that we have to operate in a socially responsible manner in order to maintain and enhance the acceptability of the social market economy as an economic system, to promote our corporate reputation and to remain attractive as a company for our current and future employees.

4 Henkel Annual Report 2006 Preface

For fiscal 2007, we have once again made it our target to grow stronger than our markets. We expect to achieve organic sales growth of 3 to 4 percent. We expect an increase in operating profit (EBIT) – adjusted for foreign exchange – in excess of organic sales growth. We likewise expect an increase in earnings per preferred share (EPS) in excess of organic sales growth.

Finally, we would like to express our gratitude to our shareholders for their continuing confidence and support, and to our corporate bodies and committees for their advice,

guidance and constructive criticism. In particular, we would like to thank our customers The Company around the world for their continued confidence in our Company and their loyalty to our “World of Brands”. As a source of particular pride, it is this that we have placed at the focus of our Annual Report this year.

Sincerely yours,

Dipl.-Ing. Albrecht Woeste Prof. Dr. Ulrich Lehner Chairman of the Shareholders’ Chairman of the Management Board Committee and of the of Henkel KGaA Supervisory Board of Henkel KGaA

Düsseldorf, January 30, 2007

Henkel Annual Report 2006 5 Report of the Supervisory Board

Dear Shareholders,

Once again, as required by law and the corporation’s Similarly, we scrutinized in detail the structure, the Articles of Association, we carefully and regularly moni- current challenges and the tasks of the supply chain tored the Management Board during the course of fis- management system of the Laundry & Home Care busi- cal 2006, at the same time advising on the strategic ness sector. We also held a meeting at our Genthin site development of the corporation and on major business in order to discuss these issues. The global manage- activities undertaken. ment and alignment of the Human Resources division, We were informed regularly and comprehensively including questions on recruitment and the further by the Management Board on relevant matters during development of employees, constituted another major Supervisory Board meetings, and were given additional point of discussion, and the ongoing optimization of written and verbal reports providing early and extensive our worldwide sourcing processes was likewise given information on matters of major importance, particu- detailed consideration. larly the business situation, the development of the cor- The respective product innovations and strategies poration, business policy, profitability and short-term of the individual business sectors and also questions of and long-term corporate and financial planning. In the research and development were discussed in conjunc- course of the quarterly reports, details were provided tion with examination of the associated budgets. of the sales and profits of the Henkel corporation as a whole, with further analysis by business sector and Corporate Governance and Declaration of region. In addition, the Chairman of the Supervisory Compliance Board remained in regular contact with the Chairman Again in 2006, the Supervisory Board examined the of the Management Board outside Supervisory Board issue of corporate governance. Further details of cor- meetings, receiving information on current business porate governance at Henkel KGaA are provided in the developments and consulting on important questions Corporate Governance Report (page 20 ff.), which has of corporate policy. received our full backing. In the meeting of February 13, 2007, the Supervisory Meetings Board discussed and ratified the new joint Declaration In fiscal 2006, the Supervisory Board met a total of of Compliance of the Management Board, the Share- four times. In these meetings, it discussed in detail holders’ Committee and the Supervisory Board with the reports of the Management Board and consulted respect to the German Corporate Governance Code with the Management Board on important individual for 2007. The full wording of the current and also the measures and strategic matters. previous Declarations of Compliance has been posted Aside from monitoring the activities of the Manage- on the corporation’s website. ment Board, we were primarily involved in discussions and consultations relating to the strategic alignment Annual and Consolidated Financial Statements of the corporation. One of the main activities under and Auditing Matters examination was the acquisition of leading Gillette The auditors appointed for 2006 by the last Annual deodorant brands and the associated business. In this General Meeting – KPMG Deutsche Treuhand-Gesell- connection, we also deliberated in detail on the strategy schaft Aktiengesellschaft Wirtschaftsprüfungsgesell- pursued by the Cosmetics/Toiletries business sector, the schaft (KPMG), Berlin und Frankfurt/Main, Germany special features of this business and its commercial – have examined the 2006 annual financial statements development. of Henkel KGaA and the 2006 consolidated annual

6 Henkel Annual Report 2006 Report of the Supervisory Board

financial statements including the management re- recommendation by the personally liable managing ports, together with the accounting records from which partners for appropriation of the profit of Henkel KGaA. they were prepared, and have issued them with an We likewise ratified our proposals for resolution to be unqualified opinion. presented before the Annual General Meeting. KPMG reports that the annual financial statements give a true and fair view of the net assets, financial Risk Management position and results of operations of Henkel KGaA in We received detailed information on the risk manage- accordance with generally accepted German accounting ment system in place at Henkel with quantification of

principles, and that the consolidated financial state- major individual risks. Our considered opinion is that The Company ments give a true and fair view of the net assets, finan- there is no apparent evidence of any risks that could cial position and results of operations of the Group and endanger the continued existence of the corporation of its cash flows for the year under review, in compli- as a going concern. In the course of the year-end audit, ance with International Financial Reporting Standards. KPMG also investigated the structure and function of KPMG further confirms that the consolidated financial the risk management system and found no cause for statements and Group management report for the year reservations. In our own view, too, the risk management under review meet the requirements of §315a (1) HGB system corresponds to the statutory requirements. (German Commercial Code). All the documentation relating to the annual fi- Membership of the Supervisory Board and nancial statements and the recommendations by the Management Board personally liable managing partners for the appropria- Effective the end of the Annual General Meeting on tion of profits, and also the audit reports of KPMG, have April 10, 2006, Mr. Benedikt-Joachim Freiherr von been laid before the Supervisory Board. We examined Herman and Mr. Heinrich Thorbecke resigned their these documents and discussed them at our fiscal re- seats as shareholder representatives on the Supervi- port meeting of February 13, 2007. This was held in the sory Board. Mr. Konstantin von Unger and Mr. Thomas presence of the auditors who reported on their main Manchot were elected by the Annual General Meeting audit findings. As in previous years, we also convened to take their place as new members of the Supervisory on the preceding day in order to discuss in detail with Board. the auditors, the Chairman of the Management Board There were no personnel changes in the Manage- and the Chief Finance Officer all the salient aspects ment Board during 2006. of the financial statements and the auditor’s reports The Supervisory Board thanks the Management appearing to us to be of importance. Board and all Henkel employees for their outstanding We concur with the auditor’s findings and, hav- efforts and commitment in 2006. ing concluded our own examination, see no reason for reservation or objection in respect of the financial Düsseldorf, February 13, 2007 statements presented. At our meeting of February 13, 2007, we approved the annual financial statements, the consolidated financial statements and the management reports as prepared by the personally liable manag- The Supervisory Board ing partners in consultation with the other members Dipl.-Ing. Albrecht Woeste of the Management Board, and we also endorsed the (Chairman)

Henkel Annual Report 2006 7 Management Board Management Board

Henkel is a leader with brands and technologies that make people’s lives easier, better and more beautiful.

from left to right

Dr. Friedrich Stara The Company Executive Vice President Laundry & Home Care, born 1949; with Henkel since 1976.

Hans Van Bylen Executive Vice President Cosmetics/Toiletries, born 1961; with Henkel since 1984.

Dr. Lothar Steinebach Executive Vice President Finance, born 1948; with Henkel since 1980.

Prof. Dr. Ulrich Lehner1) Chairman of the Management Board of Henkel KGaA, born 1946; with Henkel since 1981 including an interim break of three years.

Kasper Rorsted Executive Vice President Human Resources/ Purchasing/Information Technologies/ Infrastructure Services, born 1962; with Henkel since 2005; Vice-Chairman of the Management Board since January 1, 2007.

Alois Linder Executive Vice President Consumer and Craftsmen Adhesives, born 1947; with Henkel since 1979.

Dr. Jochen Krautter1) Executive Vice President Henkel Technologies, born 1942; with Henkel since 1973.

1) Personally liable managing partner

Henkel Annual Report 2006 9 Branding Strategy

Branding Strategy

Our brands are successful thanks to innovations conceived in close cooperation with customers and users alike. This enables us both to respond quickly to the changing needs of our target groups and to consistently introduce into the market products that are truly capable of satisfying the high quality demands of modern, aware consumers. Underlying this approach is our commitment to support, manage and sustain both strong global brands and strong regional and local brands.

Our leading brands are characterized by >> innovation >> quality >> trust >> added value Laundry & Home Care Henkel’s World of Brands is extensively composed of innovations that, again and again, offer surpris- ing solutions to – sometimes longstanding – prob- lems. At the same time, we ensure that our brands continuously live up to the imperative of delivering optimum quality. “Quality from Henkel” is much more than a slogan, it is a perpetual commitment. Tangible, appreciable quality provides consumers with that essential and constant reminder that they really can trust our brands. And while these consistent and superior product experiences deliver key added value to consumers, on the business side the loyalty of our customers is reflected by the rise in our sales and profits.

10 Henkel Annual Report 2006 Branding Strategy

Cosmetics/ Toiletries The Company

Consumer and Craftsmen Adhesives

Henkel Technologies

Henkel Annual Report 2006 11 Our Top Brands

Our Top Brands

Laundry & Home Care Cosmetics/Toiletries

Heavy-duty detergents; fabric softeners; laundry Hair shampoos and conditioners; hair colorants; conditioning products; dishwashing products; all- hair styling and permanent wave products; toilet purpose cleaners; scouring agents; floor and carpet soaps; shower gels and bath products; deodorants; care products; bath and toilet cleaners; glass clean- skin creams; skin care products; dental care and ers; kitchen cleaners; specialty cleaners; air freshen- oral hygiene products; perfumes and fragrances; ers and insecticides for household applications hair salon products

12 Henkel Annual Report 2006 Our Top Brands

Consumer and Craftsmen Henkel Technologies Adhesives The Company

Wallpaper pastes; ceiling, wall covering and tile Bookbinding and labeling adhesives; wood adhesives; adhesives; home decoration products; sealants; hygiene product adhesives; structural adhesives; polyurethane foam fillers; cyanoacrylates; contact packaging adhesives; laminating adhesives; reaction adhesives; wood glues; assembly adhesives; PVC pipe adhesives; high-performance sealants; polyurethane adhesives; flooring adhesives; waterproofing prod- adhesives and sealants; cable insulating compounds ucts; thermal insulation products; coatings; roofing and sealants; corrosion inhibitors; surface treat- products; glue sticks; glue rollers; correction prod- ment systems for metals; PVC and polyacrylate plas- ucts; adhesive tapes tisols; water treatment products; cleaning agents; lubricants

Henkel Annual Report 2006 13 Innovations

2006, 2007, 2008 – Years of Innovation

Year of Innovation 2006 At the core of our initiative is our innovation strategy A vibrant innovation culture provides the founda- with two central objectives: first, to achieve above- tion for corporate success. All our employees are average growth in our relevant markets. And second, potential donors of ideas capable of taking Henkel to improve our cost structures and thus our margins forward. In 2006, we initiated a three-year innovation through enhanced efficacy and efficiency. We are campaign in order to sharpen the awareness of all placing these goals at the center of an innovation our people with respect to the importance of innova- philosophy that explicitly extends beyond products tions. Innovation has become a matter for everybody and services to processes in sales, the supply chain, – not just for specialists in research or marketing but purchasing, personnel and finance. also for every other employee. And now, through the In the 2006 kick-off year for this three-year in- “Henkel Innovation Trophy”, we are also involving novation offensive, we concentrated on making all external creative minds in the process of generating our employees conscious of the great importance ideas. of innovation. Ulrich Lehner, Chairman of the Man- agement Board, appealed to all Henkel’s people to contribute two to three ideas of their own.

Laundry & Home Care Cosmetics/Toiletries

Funny Man Gliss Total Repair 19 This design innovation comes with proven degreas- The care line with 19 repair actives generating a total ing power for a gleaming shine. repair effect for improved resistance and healthy, shin- Persil with a touch of Vernel ing hair. An innovation that combines the cleanliness of Taft Titane Persil with the softness and freshness of Vernel. The ultimate-strength hair gel for stand-out styles that Somat 7 hold even under the most extreme conditions. The first automatic dishwashing detergent to offer Dial for Men seven functions – with an improved cleaning formu- The first Dial body wash series for men, offering ulti- la and a low-temperature activator. mate cleanliness without drying skin. Igora Royal The high-performance formulation for superior color intensity, gray coverage, skin compatibility and application convenience.

14 Henkel Annual Report 2006 Innovations

Let’s innovate! this endeavor, we want to standardize our innovation By the end of January 2007, the number of new process as far as possible, but without impairing our ideas collected through participation of Henkel ability to accommodate the needs and desires of our employees amounted to 67,000. So far, every fifth customers. In the industrial business, close technical suggestion passing through the initial selection cooperation with customers is the key to successful phase has been recommended by the assessors innovation. In the Laundry & Home Care, Cosmetics/ either for implementation or for further examination, Toiletries and Consumer and Craftsmen Adhesives and numerous product ideas are now at the realiza- business sectors, it is particularly our ability to iden-

tion stage. In the coming two years, the emphasis tify the needs of consumers and to convert these in- The Company will be on further optimizing our innovation manage- sights into products that will govern penetration. So ment system. Our aim is to be regarded by our cus- once again, the appeal in 2007 and 2008 will read: tomers and the interested public as a leader in inno- “Let’s innovate!”. vation. Aware of the need to maintain a balance in

Consumer and Craftsmen Henkel Technologies Adhesives

Pritt Pen Roller Terostat Direct Glazing Adhesives The Pritt product for clean, fast and precise correc- Polyurethane adhesive for direct fixing of wind- tion; winner of the 2006 iF design award. shields in car and truck bodies; significantly reduced Loctite Super Glue Brush-on curing time. For a uniform coating, clean, fast and easily applied Loctite 3876 over large surfaces; multi-purpose applicability; High-performance adhesive for the electronics indus- bottle with drip guard. try with improved thermal conductivity for the dissi- Pattex PL 700 Assembly Adhesives (FLEXTEC) pation of waste heat from electronic components. Universal assembly adhesive with patented FLEXTEC P3-Neutracare 3000 series technology. High initial adhesion and final strength. Cleaning agent for metal surfaces with improved For indoor and outdoor use; effective even on wet formulation, for enhanced rust protection without substrates. Also suitable for sealing applications. costly additives, easier bath maintenance and longer cleaning agent life.

Henkel Annual Report 2006 15 Shares and Bonds

Shares and Bonds

Henkel share reaches all-time high the DAX, the latter increasing by 22.0 percent in the Both DAX and sector index year under review. The price of the Henkel ordinary share increased by 25.0 percent, closing the year at outperformed 98.20 euros. International shareholder structure Henkel’s shares also significantly outperformed the Dow Jones Euro Stoxx Consumer Goods index, which Liquidity of Henkel preferred share rose by 20.2 percent compared to the previous year. increased Back in March 2006, the price of our preferred share Henkel represented in two different rose above the previous all-time high of 94.84 euros bond categories with hybrid and achieved in 1998. It reached its new all-time high on December 15, 2006 with a closing price of 113.45 euros, senior bonds the acceleration in our organic sales growth combined with improved profitability having been very positively For Henkel shares, 2006 was a year of records. Follow- received by the investment community. ing an already excellent 2005 with an increase in price As the price of Henkel’s preferred shares increased, of 32.8 percent, the preferred share rose by a further so did their trading volumes, which averaged 401,000 31.2 percent in 2006 compared to the closing price of preferred shares per trading day (2005: 383,000). The the previous year, ending the year at 111.48 euros. As average for our ordinary shares was 47,200 per trading in 2005, the preferred share thus again outperformed day, 2,800 fewer than in the previous year. The market

Relative performance of Henkel preferred share versus market in 2006 in euros

December 29 September 29 111.48 euros 120 109.66 euros

March 31 96.47 euros June 30 100 December 30, 2005 89.36 euros 85.00 euros

80 Henkel preferred share DAX (indexed) DJ Euro Stoxx Consumer Goods (indexed) January 2006 December 2006

Performance of Henkel preferred share versus market 1997 – 2006 in euros December 29, 2006 111.48 euros 120 December 30, 1998 75.16 euros December 29, 2000 69.30 euros December 31, 2004 December 30, 2002 64.00 euros 60.55 euros 70 December 30, 1996 39.42 euros

20 Henkel preferred share DAX (indexed) DJ Euro Stoxx Consumer Goods (indexed) January 1997 December 2006

16 Henkel Annual Report 2006 Shares and Bonds

capitalization of our ordinary and preferred shares in- other regional stock exchanges in Germany. In the USA, creased from 11.8 billion euros to 15.1 billion euros. investors are able to acquire Henkel preferred and or- This means that, in the course of 2006, we again dinary shares by way of stock ownership certificates succeeded in achieving one of our most important cor- obtained through the Sponsored Level I ADR (American porate objectives, namely to continue increasing the Depositary Receipt) program. The number of outstand- value of the Company over the long term to the benefit ing ADR certificates for ordinary and preferred shares of our investors. as of year-end amounted to around 1.9 million. Shareholders who invested 1,000 euros when Henkel’s The international significance of Henkel preferred

preferred shares were issued in 1985, and then re- shares is also indicated by their inclusion in major The Company invested the dividends received (excluding taxes) in the international indexes. These indexes are important stock, would have had a portfolio value of about 10,600 indicators for the capital markets and benchmarks euros by the end of 2006. This corresponds to a value for fund managers. increase of 960 percent or an average annual yield of Henkel as a DAX stock counts among the 30 most 11.8 percent. Over the same period, DAX tracking would important listed corporations in Germany. At the end have provided an annual yield of 8.6 percent. of 2006, the market capitalization of the DAX-relevant preferred shares was 6.6 billion euros, placing Henkel Henkel shares listed in all major indexes at number 27 in the DAX rankings with a weighting of Henkel shares are predominantly traded on the Xetra 0.96 percent. In addition, the Henkel preferred share electronic market of the Frankfurt Stock Exchange. is included in the international indexes MSCI Europe, Henkel is also represented on the floor of this and the Dow Jones Stoxx 600 and FTSE World Europe, and also

Key data on Henkel shares 2002 – 2006 in euros 2002 2003 2004 2005 2006 Earnings per share in accordance with IFRS1) Ordinary share 3.97 4.28 5.18 5.25 5.92 Preferred share 4.03 4.34 5.24 5.31 5.98 Share price at year-end2) Ordinary share 52.25 58.29 60.89 78.54 98.20 Preferred share 60.55 62.00 64.00 85.00 111.48 High for the year2) Ordinary share 69.69 60.90 68.00 78.54 99.43 Preferred share 77.20 64.35 73.58 85.10 113.45 Low for the year2) Ordinary share 50.60 43.88 52.51 60.95 76.97 Preferred share 59.18 49.56 56.00 64.38 84.63 Dividends Ordinary share 1.06 1.14 1.24 1.30 1.443) Preferred share 1.12 1.20 1.30 1.36 1.503) Market capitalization2) in billion euros 8.1 8.7 9.1 11.8 15.1 Ordinary share in billion euros 4.5 5.0 5.3 6.8 8.5 Preferred share in billion euros 3.6 3.7 3.8 5.0 6.6

1) comparable; 2004 restated and comparable 2) Xetra closing prices 3) proposed

Henkel Annual Report 2006 17 Shares and Bonds

in the ethical indexes Dow Jones Stoxx Sustainability around 1.9 percent of total preferred shares outstand- and FTSE4Good. ing. The vesting period for newly acquired shares is three years.

Share data Preferred Ordinary Henkel bonds Security Code No. 604843 604840 Henkel is represented in the international bond mar- ISIN Code DE0006048432 DE0006048408 kets by two bonds with a total volume of 2.3 billion Stock Exch. Symbol HEN3.ETR HEN.ETR euros. Number of Shares 59,387,625 86,598,625 In May 2003, Henkel KGaA issued a senior bond for 1.0 billion euros. This is also described as a benchmark International shareholder structure bond because, due to its large volume and its liquidity, Our shareholder base reflects both the increasing inter- it provides a good yardstick for the market’s assessment national alignment of our operating businesses and the of Henkel’s creditworthiness. growing interest of international investors in our stock. In November 2005, Henkel issued a subordinate Our preferred shares – the more liquid class – are widely hybrid bond in the amount of 1.3 billion euros for the owned internationally, the largest investor grouping purpose of financing a major portion of the Company’s being in the USA followed by Germany and the UK. pension obligations in Germany. The proceeds of the Around 2.5 million preferred shares have been repur- bond were allocated to a special-purpose CTA (Contrac- chased by Henkel KGaA in the past for the Company’s tual Trust Arrangement). Stock Incentive Plan. As of December 31, 2006, treasury Further detailed information regarding these bonds, stock amounted to 1.8 million preferred shares. the current developments of their respective prices and the associated risk premium (credit margin) can Employee shares in high demand be found on the internet (www.henkel.com/ir) in the Since 2001, Henkel has been operating a share owner- “Bonds” section. ship plan for all employees worldwide, known as the Employee Share Program or ESP. For each euro invested Bond data by an employee (limited to a maximum of 4 percent Senior Bond Hybrid Bond of salary up to a maximum of 4,000 euros per year), Volume 1.0 bn euros 1.3 bn euros Nominal Coupon 4.25 % 5.375 % Henkel added an additional 33 cents in 2006. The num- Coupon Payment ber of participants in this plan increased in the year Date June 10 November 25 under review, with 14,800 employees in around 50 dif- Maturity June 10, 2013 Nov. 25, 21041) ferent countries having bought Henkel shares through Listing Frankfurt Luxembourg this plan. As of December 31, 2006, employees held a Security Code No. 664196 A0JBUR total of 1.1 million shares within the ESP, representing ISIN Code DE0006641962 XS0234434222

1) first call option for Henkel on November 25, 2015

18 Henkel Annual Report 2006 Shares and Bonds

Good credit ratings retained presented the Laundry & Home Care business sector. Our creditworthiness is regularly checked by independ- At the “Henkel Technologies Day” in London, the focus ent rating agencies. was on our business sector of that name; and at the On January 12, 2006, Moody’s raised their outlook meeting in St. Petersburg, we showcased the Consumer for the long-term “A2” rating for Henkel from “negative” and Craftsmen Adhesives business sector with presenta- to “stable” in response to our good business perform- tions and tours of local DIY stores. ance and improved financial ratios. On June 29, 2006, Private investors are able to obtain all relevant in- Standard & Poor’s likewise improved their assessment formation through telephone inquiry or the constantly

of our creditworthiness, increasing their outlook for updated Investor Relations website available at www. The Company the “A–” long-term rating from “stable” to “positive”. henkel.com/ir. This also serves as the medium for the Our goal is to maintain our ratings in the “A” live broadcast of telephone and analyst conferences, range. plus the Annual General Meeting, whereby the latter also offers the possibility of obtaining extensive infor-

Credit ratings1) mation from Henkel’s management. Standard & The quality with which capital market communica- Poor’s Moody’s tions are conducted is evaluated by independent rank- Long-term (outlook) A– (positive) A2 (stable) ings. Our Investor Relations team received a number of Short-term (outlook) A–2 P–1 (stable) awards in 2006. For example, in the Investor Relations 1) at December 31, 2006 Awards conferred by Germany’s “Capital” magazine, Henkel took top position among the DAX companies, Committed to capital market communication following its runner-up place in 2005. Henkel places great importance on meaningful dia- You will find a Financial Calendar with all our im- log with both investors and financial analysts. During portant dates on the inside back cover of this Annual 28 capital market conferences and roadshows held Report. in Europe and North America, institutional investors and financial analysts were afforded the possibility Henkel shares and bonds monitored by numerous of talking directly to our top management. In addi- financial analysts tion, there were numerous telephone conferences and Henkel is tracked by a number of financial analysts one-on-one meetings – amounting to more than 500 – primarily in Germany, the UK and the USA. Over 40 events in all. analysts regularly publish studies and commentaries Moreover, we provided investors and analysts with on current developments at the Company, and issue specific insights into our operating business sectors. their recommendations accordingly. At the Analyst and Investor Meeting in Düsseldorf, we

Henkel Annual Report 2006 19 Group Management Report: Corporate Governance

Corporate Governance

Value creation as the foundation of Division of the capital stock, shareholder rights our managerial approach The capital stock of the Company amounts to 373,724,800 euros. It is divided into a total of 145,986,250 Sustainability as a criterion for bearer shares of no par value (share certificates), of responsible management which 86,598,625 are ordinary shares (proportion of Transparency underpinned by an capital stock: 221,692,480 euros or 59.3 percent) and active and open information policy 59,387,625 preferred shares (proportion of capital stock: 152,032,320 euros or 40.7 percent). Henkel has committed to the above maxims. Corporate Each ordinary share grants to its bearer one vote. Governance in the sense of responsible, transparent The preferred shares accord to their bearers all share- management and control of the Company aligned to holder rights apart from the right to vote. Unless oth- the long-term increase in shareholder value has long erwise resolved in General Meeting, the unappropri- been an essential component of our corporate culture, ated profit is distributed as follows: first, the holders and will remain so into the future. of preferred shares receive a preferred dividend in the amount of 0.11 euros per preferred share. The holders I. Corporate Governance Report1) of ordinary shares then receive a dividend of 0.05 euros per ordinary share, with the residual amount being The Corporate Governance Report describes the prin- distributed to the holders of ordinary and preferred ciples of the management and control structure and shares in accordance with the proportion of the capital also the main rights of shareholders of Henkel KGaA; stock attributable to them (Article 35 of the Articles in addition, it explains the special features that arise of Association). Cancellation or limitation of this pre- from our specific legal form and Articles of Association ferred dividend requires the consent of the holders of (corporation byelaws) as compared to a stock corpora- preferred shares. If the preferred dividend is not paid tion. It takes into account the recommendations of the out either in part or in whole in a year, and the arrears German Corporate Governance Code and contains all are not paid off in the following year together with the the information required by the provisions of the HGB full preferred share dividend for that second year, the (German Commercial Code) as amended by the German holders of preferred shares are accorded voting rights Takeover Directive Implementation Act. until such arrears are paid. The shareholders exercise their rights in the Annual Legal form General Meeting as per the relevant statutory provi- Henkel is a “Kommanditgesellschaft auf Aktien” (KGaA), sions and the Articles of Association of Henkel KGaA. In i.e. a partnership limited by shares and incorporated particular, they may vote (as per entitlement), speak on under German law. A KGaA is a company with its own agenda items, ask questions and propose motions. legal personality (i.e. it is a legal person) and with at least one partner who has unlimited liability with Approved capital, share buyback respect to the company’s creditors (personally liable According to Art. 6 (5) of the Articles of Association, there partner). The other (limited) partners participate in the is an authorized capital limit. Acting within this limit, capital stock, which is split into shares. Beyond these the personally liable partners are authorized, subject to contributions, they are not personally liable for the the approval of the Supervisory Board and of the Share- company’s debts. Hence, a KGaA is a hybrid of a stock holders’ Committee, to increase the capital stock of the corporation and a limited commercial partnership. Company in one or several acts until April 9, 2011, by up It is predominantly governed by the German Stock to a total of 25,600,000 euros through the issue for cash Corporation Act (AktG). of new preferred shares with no voting rights. 1) part of the Group Management Report 20 Henkel Annual Report 2006 Group Management Report: Corporate Governance

In addition, the personally liable partners are autho- the General Meeting, engages in the management of rized to purchase ordinary and/or preferred shares of the Company, appoints and dismisses personally liable the Company at any time up to October 9, 2007, subject partners, appoints and dismisses the Chairman of the to the condition that the shares acquired on the basis Management Board and the other members of the Man- of such authorization, together with the other shares agement Board, and regulates their legal relationships that the Company has already acquired and holds as (§ 278 (2) AktG in conjunction with § 114 and § 161 HGB treasury stock, shall not at any time exceed 10 percent and Art. 8, 11 and 26 of the Articles of Association). in total of the capital stock. The Shareholders’ Committee has established a

Finance and also a Human Resources Subcommittee The Company Major shareholders drawn from among its members. The Finance Subcom- According to notifications received on July 8, 2004, a mittee deals principally with the financial matters, ac- total of 51.48 percent of the voting rights are held by counting issues including the statutory year-end audit, parties to the Henkel family’s share-pooling agreement. taxation and accounting policy, and the internal audit This agreement was concluded between members of the and risk management of the corporation. The Human families of the descendants of Company founder Fritz Resources Subcommittee deals principally with person- Henkel; it contains restrictions with regard to transfers nel matters relating to the Management Board, human of the ordinary shares covered (Art. 7 of the Articles of resources strategy, and remuneration. Association: “Stock Transfer Restrictions Agreement”). The Management Board, the Shareholders’ Commit- In addition, Jahr Vermögensverwaltung GmbH & Co. tee and the Supervisory Board work closely together for KG, Hamburg, Germany, which holds more than 5 per- the good of the corporation. The Management Board cent of the total voting rights, has undertaken, per an discusses the strategic direction of the corporation agreement concluded with parties to the Henkel share- with the Shareholders’ Committee, and the two bodies pooling agreement, to exercise its voting rights at the regularly consult on progress in its implementation. Annual General Meeting of Henkel KGaA in concert with those parties whenever the latter have decided Annual General Meeting to cast all their votes in the same way. The Annual General Meeting of Henkel KGaA essentially has the same rights as the Shareholders’ Meeting of a Management Board/Supervisory Board/ German stock corporation (AG). In addition, it votes Shareholders’ Committee on the adoption of the annual financial statements of At Henkel KGaA, the duties of the Board of Directors the Company and the appointment of members of the of a German stock corporation are performed by the Shareholders’ Committee, and it ratifies the actions of Management Board. This comprises the personally the corporate bodies. Numerous resolutions passed in liable managing partners plus other duly appointed General Meeting, such as the adoption of the annual members, and is headed by a Chairman. financial statements, require the approval of the per- In accordance with Germany’s Codetermination Act sonally liable managing partners. of 1976, Henkel also has a Supervisory Board with 16 Unless otherwise required by mandatory provisions members made up of an equal number of shareholder of statute or the Articles of Association, the resolu- and employee representatives. Its purpose is to regularly tions of the Annual General Meeting are adopted by advise and to monitor the Management Board in its simple majority and, inasmuch as a majority of shares stewardship of the Company. is required by statute, by simple majority of the vot- According to the Articles of Association, in addition ing stock represented (Art. 24 of the Articles of Asso- to the statutory Supervisory Board, Henkel also has a ciation). This also applies to changes in the Articles standing Shareholders’ Committee which, in lieu of of Association; however, modifications to the Object

Henkel Annual Report 2006 21 Group Management Report: Corporate Governance

of the Company require a three-quarters’ majority III. Remuneration Report1) (§ 179 (2) AktG). The Remuneration Report provides an outline of the II. Application of the German Corporate compensation system for the Management Board, the Governance Code Supervisory Board and the Shareholders’ Committee of Henkel KGaA, and also indicates the level and structure Notwithstanding the special features arising from its of the remunerations paid. legal form and Articles of Association, Henkel KGaA The Remuneration Report takes into account the complies with the main recommendations (“shall” recommendations of the German Corporate Governance provisions) of the German Corporate Governance Code, Code. It contains the information required according to with one exception: in order to protect the legitimate the provisions of the HGB (German Commercial Code) interests and private spheres of the members of the as amended by the Disclosure of Management Remu- corporate bodies who are also members of the Henkel neration Act; this information has therefore not been family, their individual shareholdings are not disclosed repeated in the Notes to the Consolidated Financial unless required by priority statutory obligations. The Statements. Code requires disclosure of shareholdings in excess of 1 percent. 1. Remuneration of the Management Board In addition, Henkel complies with all the suggestions (“may/should” provisions) of the Code. The cor- Regulation responding Declarations of Compliance can be found The remuneration of the members of the Management on our website at www.henkel.com/ir. Board is regulated by the Human Resources Subcommit- In accordance with the Declaration of Compliance, tee of the Shareholders’ Committee, which regularly the following details are disclosed in relation to notifi- reviews the compensation system in terms of structure able shareholdings: The aggregate shares held by the and amounts involved. members of the Supervisory Board and the Shareholders’ Committee exceed in both cases 1 percent of the shares Structure and amounts issued by the Company. The aggregate shareholding In accordance with the objective of achieving a continu- of the members of the Management Board is less than ous and sustainable increase in shareholder value, the 1 percent of the shares issued by the Company. remuneration of the Management Board is character- As disclosed in the notifications published per § 15a ized by a high proportion of performance-related com- WpHG (Securities Trading Act, “Directors’ Dealings”), pensation. The package comprises three components: a in fiscal 2006 members of the Management Board pur- fixed salary, a variable performance-related short-term chased 1,000 preferred shares and sold 3,600 preferred cash payment (short-term incentive/STI) and a variable shares; members of the Supervisory Board/Sharehold- performance-related long-term incentive (LTI) in the ers’ Committee purchased 854 ordinary shares and 361 form of a share-based payment. In addition, the mem- preferred shares. Persons closely related to members of bers of the Management Board have been assigned cer- the Management Board, the Supervisory Board or the tain pension entitlements that are subject to a process Shareholders’ Committee sold 5,000 preferred shares. of escalation. The components in detail: For further details in this regard, and also in relation to corporate governance in general, please log on Fixed salary to our website at www.henkel.com/ir. The amount of fixed salary is determined on the basis of the functions and responsibilities of the recipients 1) part of the Group Management Report

22 Henkel Annual Report 2006 Group Management Report: Corporate Governance

concerned, their time of tenure as members of the Man- the performance period, earnings per preferred share agement Board, and prevailing market conditions. increase by at least 15 percent, 21 percent or 30 percent, each participant is allocated the monetary value Other emoluments of 600, 1,200 or 1,800 shares respectively. To calculate The other emoluments largely relate to benefits arising the increase in EPS, the EPS of the financial year prior out of standard insurance policies and the provision to the year of issue is compared to that of the second of a company car. financial year following the year of issue. Calculation is based on the approved and endorsed consolidated

Short-term incentive financial statements of the respective financial years as The Company The performance criteria governing the short-term duly audited and provided with an unqualified opinion, incentive are primarily return on capital employed whereby EPS is also adjusted for exceptional items. The (ROCE) and earnings per share (EPS). The individual monetary value per share essentially corresponds to the performance of the Management Board member con- reference price of the Henkel preferred share. A ceiling cerned, and the size, significance and development of value (cap) is imposed in the event of extraordinary the business/management sector(s) involved are also share price increases. taken into account. Payment is made in arrears on an annual basis as a function of the performance achieved Other regulatory provisions in the immediately preceding financial year. The contracts of employment of the members of the Management Board do not contain any specific provi- Long-term incentive sion for severance pay in the event of premature termi- Each member of the Management Board is allocated, as nation of the employment relationship. In the event of a function of the absolute increase in the price of the members of the Management Board taking retirement, Henkel preferred share and the increase in the earnings they are entitled to continued payment of their remu- per Henkel preferred share (EPS) achieved over a period neration for a further six months up to the month of of three years (performance period), the cash equiva- their 65th birthday. lent of up to 3,600 shares – so-called cash performance The Company maintains on behalf of members of units – per financial year (= tranche). On expiry of the corporate bodies and employees of Henkel a third-party performance period, the number and the value of the group insurance policy protecting against consequen- shares are determined and the resulting tranche income tial loss, which policy also covers members of the Man- is paid in cash. Each member of the Management Board agement Board. participating in the tranche is required to acquire a personal stake by investing in Henkel preferred shares Remuneration of the Management Board in 2006 to the value of 25 percent of the gross tranche payout, The total compensation paid to members of the Manage- and to place these shares in a blocked custody account ment Board for the performance of their duties for and with a five-year drawing restriction. on behalf of Henkel KGaA and its subsidiaries during In the event of an absolute rise in the share price the year under review amounted to 15,431k euros (2005: during the performance period of at least 15 percent, 14,153k euros). This comprises total cash emoluments 21 percent or 30 percent, each participant is allocated paid in respect of 2006 and a long-term incentive (LTI) the monetary value of 600, 1,200 or 1,800 shares respec- payable at the end of 2009 as a function of the degree tively. To calculate the price increase, the average price of attainment of the associated performance targets. Of in January of the tranche issue year is compared to the the total 2006 cash emoluments amounting to 13,641k average price in January of the third financial year euros (2005: 13,104k euros), 3,948k euros was attribut- following the issue year (reference price). If, during able to fixed salaries (2005: 3,374k euros), 9,423k euros

Henkel Annual Report 2006 23 Group Management Report: Corporate Governance

to the short-term incentive (2005: 9,430k euros) and pension entitlement earned prior to entry into the 271k euros to other emoluments (2005: 300k euros). Management Board; and an annual percentage increase The value of the LTI (cash performance units) was based of the base percentage during the executive’s member- on an increase in both parameters (EPS/share price) ship of the Management Board. of 21 percent. This yields an amount of 1,790k euros Effective January 1, 2005, the pension system for (2005: 1,049k euros). new members of the Management Board was changed The remunerations of the individual members of the to a defined-contribution scheme. Once a covered event Management Board for the year under review are indicat- occurs, the members of the Management Board receive ed in the table below together with a breakdown accord- a superannuation endowment in the form of a lump- ing to the individual components referred to above. sum payment combined with a continuing basic an- The remunerations of the personally liable man- nuity. The superannuation endowment comprises the aging partners are subject to turnover tax (VAT). As a total of annual contributions calculated on the basis deductible input tax, this represents no net burden of a certain percentage of the fixed salary and of the for Henkel KGaA. Therefore, the tax amounts have not short-term incentive, this percentage being the same for been included in the above data. all members of the Management Board. Any vested pension rights earned within the corporation prior to the Pension benefits executive’s joining the Management Board are taken The retirement pension for members joining the Man- into account as start-up units. This ensures the estab- agement Board before January 1, 2005 amounts to a lishment of a performance-related pension system. certain percentage of the last paid fixed salary (defined The pension benefits or additions to pensions in benefit). For these Management Board members, the the period under review accruing to the members of amount payable is set at 60 percent of the final fixed the Management Board as of the balance sheet date are salary in the event of retirement after their 62nd birth- shown in the tables below. day. The actual percentage individually determined A total of 61,177k euros (2005: 62,041k euros) has for each executive is made up of two components: the been provided for pension obligations to former mem- so-called base percentage rate derived from the vested bers of the Management Board of Henkel KGaA and the

Management Board remunerations in k euros Cash components Total cash Value of Total Fixed Short-term Other remunera- long-term remunera- salary incentive emoluments tions incentives1) tions1) Prof. Dr. Ulrich Lehner 768.0 2,002.5 49.0 2,819.5 255.7 3,075.2 Dr. Jochen Krautter 546.0 1,305.0 39.3 1,890.3 255.7 2,146.0 Alois Linder 546.0 1,205.0 42.0 1,793.0 255.7 2,048.7 Kasper Rorsted 516.0 1,235.0 46.7 1,797.7 255.7 2,053.4 Dr. Friedrich Stara 516.0 1,235.0 37.3 1,788.3 255.7 2,044.0 Dr. Lothar Steinebach 546.0 1,235.0 27.5 1,808.5 255.7 2,064.2 Hans Van Bylen 510.0 1,205.0 28.7 1,743.7 255.7 1,999.3 2006 3,948.0 9,422.5 270.5 13,641.0 1,789.9 15,430.9 25.6 % 61.1 % 1.7 % 11.6 % 100.0 % 2005 3,374.0 9,430.0 300.0 13,104.0 1,049.0 14,153.0 23.9 % 66.6 % 2.1 % 7.4 % 100.0 %

1) LTI payout in 2009; these figures will only be attained in the event of EPS/share price increasing by 21 percent in the performance period.

24 Henkel Annual Report 2006 Group Management Report: Corporate Governance

Management Board pensions in euros Retirement pensions p.a. on onset Additions to pension Defined benefit1) of pension, as of balance sheet date provisions for 2006 Prof. Dr. Ulrich Lehner 531,000.00 3,022,972.00 Dr. Jochen Krautter 372,000.00 974,274.00 Alois Linder 333,000.00 1,157,290.00 Dr. Lothar Steinebach 315,000.00 1,243,788.00 1) the total amount of additions to pension provisions (defined benefit) is characterized by the one-off effect of actuarial adjustments for standard market changes in fixed salaries implemented during the year under review. The Company

Management Board pensions in euros Superannuation endowment (lump sum) Basic annuity Addition to Addition to superannuation Total basic basic annuity Defined contribution Total lump sum endowment for 2006 annuity (p.a.) for 2006 Kasper Rorsted 284,670.00 227,970.00 506.28 282.96 Dr. Friedrich Stara 206,010.00 175,770.00 224.18 147.02 Hans Van Bylen 201,554.10 171,090.00 410.47 268.99 former directors of its legal predecessor, or their surviv- fee in the latter case is due to the fact that, as required ing dependants. Amounts paid during the year under by the Articles of Association, the Shareholders’ Com- review totaled 5,137k euros (2005: 7,891k euros). mittee is involved in business management activities.

2. Remuneration of the Supervisory Board and Dividend bonus of the Shareholders’ Committee Each member of the Supervisory Board and of the Shareholders’ Committee further receives an annual Regulation bonus of 2,000 euros for every full 0.05 euros by which The remunerations for the Supervisory Board and the the preferred dividend paid out for the prior year ex- Shareholders’ Committee have been approved in Gener- ceeds 0.75 euros. al Meeting; the corresponding provisions are contained in Articles 17 and 33 of the Articles of Association. Long-term incentive As a long-term incentive, each member of the Supervis- Structure and amounts ory Board and of the Shareholders’ Committee receives The structure and amount of the remunerations are an additional cash payment each year, the amount of commensurate with the size of the corporation and which depends on the increase in earnings per pre- the functions performed by the Supervisory Board and ferred share over a three-year reference period. The EPS Shareholders’ Committee respectively. of the financial year preceding the payment-related year The remuneration is made up of three components, a is compared with the EPS of the second financial year fixed fee, a variable, dividend-related bonus and a variable following the payment-related year. If the increase is at performance-related long-term incentive. The details: least 15 percent, an amount of 600 euros is paid for each full percentage point of the total achieved increase. If Fixed fee the increase reaches a minimum of 21 percent, the Each member of the Supervisory Board and of the Share- amount paid per percentage point is 700 euros, and if holders’ Committee receives a fixed fee of 20,000 euros the increase is a minimum of 30 percent, the amount and 50,000 euros per year respectively. The higher fixed paid per percentage point is 800 euros. Calculation of

Henkel Annual Report 2006 25 Group Management Report: Corporate Governance

the increase is based on the endorsed and approved plus turnover tax of 131k euros (2005: 801k euros plus consolidated financial statements of the respective turnover tax of 121k euros). Of this figure, 350k euros financial years as audited and provided with an un- was for fixed fees, 525k euros for the dividend bonus qualified opinion, whereby EPS is also adjusted for and 31k euros for attendance fees. exceptional items. The total of the dividend bonus and The total remunerations of the members of the the long-term incentive is, however, limited to 50,000 Shareholders’ Committee (fixed fee and dividend bonus euros (cap). – including the components payable for subcommittee activity) amounted to 1,920k euros (2005: 1,741k euros). Remuneration for chairpersons/ Of this figure, 1,200k euros was for fixed fees and 720k vice-chairpersons/subcommittee members euros for the dividend bonus. The Chairperson of the Supervisory Board and the The dividend bonus in each case was based on a Chairperson of the Shareholders’ Committee each re- dividend of 1.50 euros per preferred share. ceives double the amount, and the Vice-Chairperson In addition, the members of the Supervisory Board in each case one-and-a-half times the amount accruing and of the Shareholders’ Committee are entitled to a to an ordinary member. Members of the Sharehold- long-term incentive (LTI) for 2006 in the form of a de- ers’ Committee who are also members of one or more ferred conditional payment entitlement which will be subcommittees of the Shareholders’ Committee each paid out following the 2009 Annual General Meeting as additionally receive remuneration equivalent to the a function of the earnings per preferred share achieved initial amount; if they are the chairperson of one or in fiscal 2008. According to our Articles of Association, more subcommittees, they receive double. the total of dividend bonus and LTI is limited to a ceiling of 50k euros per individual member. Given this Other regulatory provisions upper maximum, and assuming an increase in EPS of The members of the Supervisory Board receive an attend- 21 percent, the totals applicable are 257k euros for the ance fee amounting to 500 euros for each meeting in Supervisory Board and 353k euros for the Shareholders’ which they participate. In addition, the members of the Committee (including remuneration components for Supervisory Board and of the Shareholders’ Committee subcommittee activity). are reimbursed expenses arising from pursuit of their The total remunerations of the members of the mandates. The members of the Supervisory Board are Super visory Board (fixed fee, dividend bonus, LTI 2006 also reimbursed the turnover tax (VAT) payable on their and attendance fees) for the year under review amount- total remunerations and reimbursed expenses. ed to 1,163k euros plus turnover tax (2005: 1,256k euros The corporation maintains on behalf of members of plus turnover tax). corporate bodies and employees of the Henkel corpora- The total remunerations of the Shareholders’ Com- tion a third-party group insurance policy protecting mittee (fixed fee, dividend bonus and LTI 2006, includ- against consequential loss, which policy also covers ing remuneration components payable for subcom- members of the Supervisory Board and of the Share- mittee activity) for the year under review amounted holders’ Committee. to 2,273k euros (2005: 2,350k euros). The remunerations of the individual members of 2006 remunerations the Supervisory Board and of the Shareholders’ Com- For the 2006 fiscal year, total remunerations paid to the mittee, broken down according to the above-mentioned members of the Supervisory Board (fixed fee, dividend components, are indicated in the following tables: bonus and attendance fee) amounted to 906k euros

26 Henkel Annual Report 2006 Group Management Report: Corporate Governance

Remunerations in euros Cash components Total cash Value of Total Dividend Attendance remunera- long-term remunera- Supervisory Board Fixed fee bonus fee tions incentives1) tions1) Dipl.-Ing. Albrecht Woeste, Chairman 40,000 60,000 2,000 102,000 29,400 131,400 Winfried Zander, Vice-Chairman 30,000 45,000 2,000 77,000 22,050 99,050 Dr. Friderike Bagel 20,000 30,000 2,000 52,000 14,700 66,700 Engelbert Bäßler 20,000 30,000 2,000 52,000 14,700 66,700 Hans Dietrichs 20,000 30,000 2,000 52,000 14,700 66,700 Benedikt-Joachim Freiherr von Herman The Company (until April 10, 2006) 5,425 8,137 500 14,062 3,987 18,049 Bernd Hinz 20,000 30,000 2,000 52,000 14,700 66,700 Thomas Manchot (since April 10, 2006) 14,575 21,863 1,500 37,938 10,713 48,651 Prof. Dr. Dr. h.c. mult. Heribert Meffert 20,000 30,000 2,000 52,000 14,700 66,700 Andrea Pichottka 20,000 30,000 2,000 52,000 14,700 66,700 Prof. Dr. Dr. h.c. mult. Heinz Riesenhuber 20,000 30,000 2,000 52,000 14,700 66,700 Heinrich Thorbecke (until April 10, 2006) 5,425 8,137 500 14,062 3,987 18,049 Konstantin von Unger (since April 10, 2006) 14,575 21,863 1,500 37,938 10,713 48,651 Michael Vassiliadis 20,000 30,000 1,500 51,500 14,700 66,200 Bernhard Walter 20,000 30,000 1,500 51,500 14,700 66,200 Werner Wenning 20,000 30,000 2,000 52,000 14,700 66,700 Dr. Anneliese Wilsch-Irrgang 20,000 30,000 2,000 52,000 14,700 66,700 Rolf Zimmermann 20,000 30,000 2,000 52,000 14,700 66,700 2006 350,000 525,000 31,000 906,000 257,250 1,163,250 2005 350,000 420,000 31,000 801,000 455,000 1,256,000 1) LTI payout in 2009; these figures will only be attained in the event of EPS increasing by 21 percent in the performance period; amounts disclosed exclude turnover tax.

Remunerations in euros Cash components Fee for sub- Total cash Value of Total Dividend committee remunera- long-term remunera- Shareholders’ Committee Fixed fee bonus activity3) tions incentives1) tions2) Dipl.-Ing. Albrecht Woeste, Chairman (Chairman Human Resources Subcommittee) 100,000 60,000 160,000 320,000 2 x 29,400 378,800 Stefan Hamelmann, Vice-Chairman 22,050 (Vice-Chairman Finance Subcommittee) 75,000 45,000 80,000 200,000 + 14,700 236,750 Dr. h.c. Christoph Henkel, Vice-Chairman 22,050 (Chairman Finance Subcommittee) 75,000 45,000 160,000 280,000 + 29,400 331,450 Dr. Paul Achleitner (Member Finance Subcommittee) 50,000 30,000 80,000 160,000 2 x 14,700 189,400 Dr. Simone Bagel-Trah (Member Human Resources Subcommittee) 50,000 30,000 80,000 160,000 2 x 14,700 189,400 Dr. h.c. Ulrich Hartmann (Member Human Resources Subcommittee) 50,000 30,000 80,000 160,000 2 x 14,700 189,400 Burkhard Schmidt (Member Finance Subcommittee) 50,000 30,000 80,000 160,000 2 x 14,700 189,400 Konstantin von Unger (Vice-Chairman Human Resources Subcommittee) 50,000 30,000 80,000 160,000 2 x 14,700 189,400 Karel Vuursteen (Member Human Resources Subcommittee) 50,000 30,000 80,000 160,000 2 x 14,700 189,400 Dr. Hans-Dietrich Winkhaus (Member Finance Subcommittee) 50,000 30,000 80,000 160,000 2 x 14,700 189,400 2006 600,000 360,000 960,000 1,920,000 352,800 2,272,800 20054) 593,709 280,964 866,306 1,740,979 608,756 2,349,735

1) including the LTI amount arising from subcommittee activity 2) LTI payout in 2009; these figures will only be attained in the event of EPS increasing by 21 percent in the performance period. 3) proportional fixed fee and dividend bonus 4) taking into account the changes implemented in 2005

Henkel Annual Report 2006 27 Group Management Report Subindex

Subindex

29 Group Management Report 40 Employees 29 Operational Activities 42 Procurement and Production 29 Overview 42 Research and Development 29 Organization and Business Sectors 45 Marketing and Distribution 29 Corporate Governance/Remuneration 46 Sustainability 29 Strategy and 2008 Financial Targets 49 Business Sector Performance 30 Value-based Management and Control 49 Laundry & Home Care 31 Statutory and Regulatory Situation 53 Cosmetics/Toiletries 32 Business Performance 57 Consumer and Craftsmen Adhesives 32 World Economy 61 Henkel Technologies 32 Private Consumption and 64 Opportunity and Risk Report Developments by Sector 64 Integrated Opportunity and Risk 32 Sales and Profits Management System and Risk Control 35 Cost Items 64 Disclosure of Major Individual Risks 35 Other Operating Charges and Income 67 Overall Risk 36 Financial Items 68 Outlook for the Henkel Group 36 Net Earnings 68 Underlying Conditions 36 Dividends and Distribution Policy 68 Sales and Profits Forecast for 2007 36 Earnings Per Share (EPS) 68 Long-term Sales and Profits Forecast 37 EVA® and ROCE 69 Post-Closure Report 37 Assets and Financial Analysis 37 Acquisitions and Divestments 38 Capital Expenditures 38 Balance Sheet Structure 39 Cash Flow Statement 40 Key Financial Ratio

28 Henkel Annual Report 2006 Group Management Report

Group Management Report for Fiscal 2006

Operational Activities The four business sectors are managed as globally operational strategic business units. They are supported Overview by the central functions of Henkel KGaA in order to Henkel was founded in 1876 and therefore, in 2006, ensure optimum utilization of corporate synergies. celebrated its 130th anniversary. Today, Henkel boasts Implementation of the strategies at a local level is the a global workforce of more than 50,000 employees and responsibility of the affiliated companies operating day in, day out, people in more than 125 countries put in the field. The executive bodies of these companies their trust in our brands and technologies. manage their businesses in line with the relevant statutory regulations, supplemented by their own articles Organization and Business Sectors of association, internal procedural rules and codes of Henkel KGaA is operationally active as well as being conduct. the parent company of the Henkel Group. In this latter capacity, it is responsible for defining the Henkel’s Corporate Governance/Remuneration corporate objectives and for the management, control Further details of corporate governance at Henkel KGaA and stewardship of corporate-wide activities, including and the remunerations of the members of the Man- risk management and the distribution of resources. agement Board, Supervisory Board and Shareholders’ Henkel KGaA performs its tasks within the legal scope Committee are provided in the Corporate Governance afforded to it as part of the Henkel Group, with the af- Report on page 20 ff. and the Remuneration Report filiated companies otherwise operating as legally inde- on page 22 ff. pendent entities. Operational control of the Company is incumbent upon the Management Board, which in Strategy and 2008 Financial Targets

turn is supported by the Corporate Center. In order to achieve our strategic objective of profitable Group Management Report Henkel is organized into four business sectors: growth, we have fixed our focus on three fast-growing >> Laundry & Home Care areas of competence: >> Cosmetics/Toiletries >> Home Care >> Consumer and Craftsmen Adhesives >> Personal Care >> Henkel Technologies >> Adhesives, Sealants & Surface Treatment

The product range of the Laundry & Home Care busi- Our four business sectors already boast leading market ness sector comprises heavy-duty detergents, special positions in these three core areas, and we intend to detergents and cleaners. The portfolio of the Cosmetics/ further expand these through not only organic sales Toiletries business sector encompasses hair cosmetics, growth but also selected acquisitions. products for body, skin and oral care, and products A further important element of our long-term and services for the hair salon business. The Consumer strategy is that of concentrated regional expansion. and Craftsmen Adhesives business sector offers home Without neglecting Western Europe, we intend to grow decoration products, adhesives and correction products our presence in the profitable North American market for the home and office, and also building adhesives. while also fixing a strong focus on the growth markets Our industrial and structural adhesives, sealants and of Eastern Europe, Africa/Middle East, Asia-Pacific and surface treatment products fall within the Henkel Latin America. Thanks to the highly dynamic develop- Technologies portfolio. ment of these growth markets in the year under review,

Henkel Annual Report 2006 29 Group Management Report

the target set for 2008 of increasing their share of sales ments in the operating margins of our growth markets. to at least 30 percent was achieved in 2006, two years We further aim to become more efficient along our ahead of schedule. We intend to remain focused on the entire value chain. dynamics of these markets going forward. Again in 2006, we came a step closer to achieving Our strong brands and successful technologies are our 2008 financial targets: expected to play a decisive role in the attainment of further growth. We are represented by our brands in Henkel Group: 2008 financial targets both the premium and value-for-money segments. The title of this year’s report, “A World of Brands”, reflects Organic sales growth p.a. 3 – 4 % our balanced mix of international, regional and lo- EBIT margin 12 % cal brands. We support these through the develop- ROCE 16 % ment of high-quality, innovative products as well as EPS growth p.a. ≥ 10 % through advertising and other promotional activities. These investments serve to enhance the value of our Value-based Management and Control brands and ensure that they remain attractive in the To make achievement of our growth targets measurable, marketplace. we have adopted a modern system of metrics allowing In 2006, our Year of Innovation, we aligned our us to calculate value-increase and return ratios in line product development activities even more closely to with capital market practice. the requirements and needs of customers and consum- We use economic value added (EVA®)1) as a central ers. And we intend to sustain this sharpened focus on performance management parameter, to assess growth innovation in the coming years. We are developing to date and to appraise future plans. more and more products together with our custom- EVA® is a measure of the additional financial value ers and consumers. We likewise have cooperation and created by a company in a given reporting period. A partnership arrangements with universities and indus- company creates economic value added if its operat- trial associations as well as participating in venture ing profit exceeds its cost of capital, the latter being capital companies. Further, we have made it a priority defined as the return on capital expected by the capital to constantly improve our innovation processes. The market. period from product idea to market launch is being Operational business performance is measured on steadily shortened through the application of increas- the basis of operating profit (EBIT). The capital em- ingly efficient procedures. This also means that we ployed figure is calculated from the assets side of the are continuously improving the deployment of our balance sheet. A reconciliation of the year-end figures financial resources. Our aim is to increase the share of in the balance sheet to the average values used in deter- sales attributable to new products launched over the mining capital employed can be found on page 108. previous three years from 25 percent to 30 percent. The cost of capital employed is calculated as a Our financial targets for 2008 envision not only weighted average of the cost of equity and debt (WACC). organic growth in sales but also above-average increases In fiscal 2006, we applied a WACC after tax of 7 percent. in both operating profit and earnings per share. We Before tax, the figure was 10 percent. We regularly likewise intend to further improve our return on capital review our cost of capital in order to reflect chang- employed (ROCE). To achieve these objectives, we will ing market conditions such as interest rate levels. At be concentrating even more on products offering high Henkel, EVA® is calculated as follows: contributions while also targeting further improve- EVA® = EBIT – (Capital Employed x WACC)

30 Henkel Annual Report 2006 1) EVA® is a registered trademark of Stern Stewart & Co. Group Management Report

EU, resulting in changes in the registration, evaluation Weighted average cost of capital 2006 and authorization of chemical substances. In certain Risk-free interest rate 4.0 % segments, the granting of approvals, permits and li- Market risk premium 4.5 % censes is subject to our ability to meet specific require- Beta factor 0.90 ments. Our production sites must also be operated in Cost of equity after tax 8.1 % line with environmental regulations. The product-specific regulations affecting us relate Cost of debt capital before tax 5.1 % primarily to ingredients and input materials, safety of Tax shield (30 %) –1.5 % manufacture, handling, and the packaging and market- Cost of debt capital after tax 3.6 % ing of the finished article. The regulatory instruments involved range from material-related regulations, usage Share of equity1) 75 % prohibitions or restrictions and procedural require- 1) Share of debt capital 25 % ments (test and inspection, marking, provision of warn- ing labels, etc.), to product liability law. In Germany, WACC after tax 7 % the following statutes are particularly important for Tax rate 30 % our operations: WACC before tax2) 10 % >> Chemicals law and hazardous substances/dangerous 1) 2) at market values 2005: 11 % goods regulations >> Food and feedstuffs code EVA® serves to promote value-adding decisions and >> Cosmetics regulations profitable growth in all our business sectors. Operations >> Detergents regulations

exhibiting consistently negative value contributions >> Biocides law Group Management Report with no prospect of positive EVA® values in the future >> Machinery, equipment and product safety law are divested or otherwise discontinued. In order to be better able to compare business units In the member states of the European Union, compli- of varying size, we additionally apply a return ratio, ance is also required with the following directives, most return on capital employed (ROCE), which is calculated of which have been transformed into national law: as follows: aerosols and biocides directives; material, preparation ROCE = EBIT/Capital Employed and safety data sheet directives; cosmetics and product ROCE represents the average return on capital em- safety directives. ployed. We create value where the return on capital National supervisory bodies monitor compliance employed exceeds the cost of capital. A breakdown with the associated rules and regulations. of our latest EVA® and ROCE figures can be found on We are also required to comply with various manu- page 37. facturing regulations in relation to the following: >> The use, storage, handling and transportation of Statutory and Regulatory Situation certain substances Our business is governed by national rules and regula- >> Emissions, wastewater, residues and waste tions and – within the European Union – increasingly materials by harmonized pan-European laws. One such currently >> The construction and operation of industrial involves the realignment of the chemical policy in the facilities

Henkel Annual Report 2006 31 Group Management Report

The prime objective of our internal standards is to en- a significant increase, particularly in Russia. In the USA, sure compliance with statutory regulations and guar- there was a slight decline in the rate of rise in private antee the safety of our production facilities for work- consumption. In Asia, growth in consumer spending ers, neighbors and the environment. The associated remained slightly behind the high rate of overall eco- requirements have been incorporated in our internal nomic growth. High increases in private consumption safety, health and environment management systems, were likewise registered in most of the countries of which in turn are subjected to a regular audit and re- Latin America. 2006 was also characterized by strong view regime. We also endeavor to ensure that relevant industrial growth. However, developments in the indi- legal requirements and statutory changes are quickly vidual sectors and regions varied considerably. identified and properly assessed and observed. While production in the US automobile industry declined, developments in Asia and Eastern Europe Business Performance reflected a healthy level of business activity. The re- mainder of the transportation sector developed very World Economy well, particularly the aircraft industry. The underlying economic conditions in 2006 remained The electronics industry also registered high growth favorable, although there were further rises in raw ma- rates on a worldwide scale in 2006. Chip production, terial prices. World economic output based on the total for example, underwent an increase in the low double- of the gross domestic product figures of the individual digit percentage range. countries underwent a further increase. The dynamism of the global economy also generated Europe achieved tangible growth. In Western Eu- strong growth momentum in the packaging industry. rope, Spain, Scandinavia and the Benelux countries The metalworking industry likewise expanded. exhibited disproportionate growth rates, while France Development of the construction industry was and Italy remained behind the European average. In very mixed in regional terms. While the US housing Germany, too, there was a degree of economic revival. industry underwent a decline, construction (including Eastern Europe once again showed strong growth. housing) in Germany showed an appreciable increase In the USA, business activity eased slightly during for the first time in some years. Construction in East- the second half of the year. ern Europe registered further strong growth. Build- Most countries in Asia exhibited considerable eco- ing activity also remained brisk in many countries of nomic robustness. The economic output of China and Asia – particularly China. Further details on develop- India underwent a rapid increase while, at a lower level, ments with respect to specific sectors and regions can Japan’s economy also expanded further. be found in the individual business sector reports. Latin America likewise experienced strong Stating on page 48. growth. Sales and Profits Private Consumption and Developments by Sector Henkel Group sales in 2006 amounted to 12,740 mil- After years in the doldrums, consumer spending in lion euros, a rise of 6.4 percent compared to the figure Germany once again increased, albeit only to a small for the previous year. Acquisitions and divestments extent. Consumers in Scandinavia, Spain and France roughly cancelled each other out, contributing just were significantly more free-spending. Only in the Neth- 0.5 percentage points to the increase. Overall, foreign erlands did consumption levels decline. In the countries exchange rates had a slightly negative effect of –0.1 per- of Eastern Europe, consumer spending also underwent centage points. Organic sales growth, i.e. sales growth

32 Henkel Annual Report 2006 Group Management Report

Sales in million euros Sales development1) 12,740 2006 11,974 12,000 10,592 Change versus previous year 6.4 % 9,656 9,436 9,000 Foreign exchange – 0.1 % After adjusting for foreign exchange 6.5 % 6,000 Acquisitions/Divestments 0.5 % Organic 6.0 % 3,000 1) calculated on the basis of units of 1,000 euros

2002 2003 2004 2005 2006

2006 sales by business sector in million euros 2006 sales by region in million euros

4,088 4,117 8,045 4,000 8,000 7,490 3,533 2,629 3,266

3,000 2,864 6,000 1,792 1,977 2,000 4,000 2,733 2,742

1,000 2,000 931 1,041 249 249 571 663 249 249 0 0 Group Management Report 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 Laundry & Cosmetics/ Consumer and Henkel Corporate Europe/Africa/ North America Latin America Asia-Pacific Corporate Home Care Toiletries Craftsmen Technologies Middle East Adhesives

adjusted for foreign exchange and acquisitions/divest- businesses from the Henkel Technologies portfolio. ments, reached 6.0 percent thanks to positive business Sales of the Corporate segment remained at the level developments. of the previous year. All our business sectors were able to increase In the regional breakdown, the sales of the Europe/ their organic sales figure, with growth rates ranging Africa/Middle East region underwent a significant in- from 4.1 percent in the case of Cosmetics/Toiletries crease of 7.4 percent to 8,045 million euros, with all to 8.9 percent at Henkel Technologies. Cosmetics/Toi- our business sectors contributing. Growth adjusted letries profited from the acquisition of a number of for foreign exchange amounted to 7.5 percent, with leading deodorant brands from Gillette, while the Eastern Europe and Africa/Middle East exhibiting dis- figures for Laundry & Home Care were affected by the proportionately high rates of rise. Germany also posted absence of sales from the Dial foods business. At Con- a gratifying plus. Overall, the share of sales accounted sumer and Craftsmen Adhesives, the acquisitions of for by the Europe/Africa/Middle East region increased Polybit, Alba Adesivos, the Cimsec tile adhesives busi- slightly to 63 percent. ness and the sealants business of Rhodia resulted in Sales of the North America region rose by 0.4 per- additional sales revenues. We divested our insulating cent to 2,742 million euros despite a negative net contri- glass sealant and rubber-to-metal bonding chemicals bution from acquisitions and divestments. Sales growth

Henkel Annual Report 2006 33 Group Management Report

EBIT in million euros 2006 EBIT by business sector in million euros

1,298 500 433 449 1,250 1,162 400 370 996 359 345 1,000 321 835 806 300 750 209 200 185 500

250 100

0 0

2002 2003 2004 2005 2006

–89 2006 EBIT by region in million euros –122

2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 1,000 957 Laundry & Cosmetics/ Consumer and Henkel Corporate 857 Home Care Toiletries Craftsmen Technologies Adhesives 800

600

400 Business in the Asia-Pacific region exhibited similarly 347 321 positive developments. Sales rose by 11.7 percent to 200 1,041 million euros, with the increase after adjust- 29 43 51 66 0 ing for foreign exchange amounting to 12.0 percent. The two business sectors Consumer and Craftsmen

–122 –89 Adhesives and Henkel Technologies particularly were

2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 able to profit from the high rate of economic growth Europe/Africa/ North America Latin America Asia-Pacific Corporate Middle East experienced by the region, of which the share of total sales remained at 8 percent. Henkel Group EBIT Operating profit (EBIT) increased to 1,298 million in million euros 2005 2006 euros, a rise of 11.7 percent above the prior-year figure EBIT from business sectors/regions 1,284 1,387 of 1,162 million euros. The new total includes profits EBIT Corporate –122 – 89 arising from the divestment of non-core businesses from EBIT 1,162 1,298 Laundry & Home Care (16 million euros) and Henkel Technologies (41 million euros), these amounts being adjusted for foreign exchange amounted to 0.8 percent. utilized in order to strengthen our operating activities. The share of total sales accounted for by this region After adjusting for foreign exchange, the increase in declined slightly from 23 to 22 percent. operating profit amounted to 11.4 percent. Thanks primarily to strong organic growth, the Return on sales increased by 0.5 percentage points Latin America region posted an increase in sales of to 10.2 percent. All our business sectors contributed 16.1 percent to 663 million euros, with all our busi- to the higher profitability levels achieved. The EBIT of ness sectors contributing. After adjusting for foreign the Corporate segment improved by 33 million euros, exchange, the sales of the region rose by 14.2 percent. to –89 million euros, due primarily to the assignment The share of total sales accounted for by Latin America of claims relating to a hereditary building lease remained at 5 percent. (43 million euros) to Henkel Trust e.V.

34 Henkel Annual Report 2006 Group Management Report

With raw material prices having, in some cases, in- 6.4 percent, return on sales in Asia-Pacific was 0.9 per- creased enormously in 2005, the rate of rise in fiscal centage points above the figure for the previous year. 2006 was lower. Developments within our individual Further details relating to our business performance business sectors were mixed. We were able to pass on can also be found in the reports dealing with the indi- a portion of the higher raw material costs in the form vidual business sectors starting on page 48. of price increases of our own. Moreover, we have now aligned our central purchasing organization along Cost Items global, cross-divisional lines in order to also secure the The cost of sales for the year under review rose by best possible procurement terms and conditions even 6.3 percent to 6,963 million euros. Despite the world- in phases of market volatility. The increase in operat- wide price increases for raw materials and packaging, ing profit and the rise in return on sales are due not we succeeded in keeping the rate of rise proportional least to the continued, successful implementation of to sales growth. Gross profit improved by 6.5 percent the restructuring measures initiated toward the end of to 5,777 million euros, and gross margin stabilized at 2004. These have led to cost reductions in production, 45.3 percent, the figure for the previous year. sales and administration. At 3,650 million euros, marketing, selling and dis- Our regions also developed very successfully, with tribution costs were 7.0 percent above the prior-year double-digit percentage increases in operating profit figure. versus prior year having been reported everywhere Expenditures on research and development amount- apart from North America. ed to 340 million euros, increasing by 4.9 percent com- In Europe/Africa/Middle East, operating profit rose pared to the figure for the previous year. The R&D ratio, by 11.7 percent (11.6 percent after adjusting for foreign i.e. research and development expenses expressed as

exchange). Here too, all our business sectors made a a proportion of sales, remained at the prior-year level Group Management Report contribution. Return on sales in this region amounted of 2.7 percent. Due to high levels of activity aligned to to 11.9 percent, representing an increase of 0.5 percent- specific projects and efficiency measures, administra- age points. tive expenses increased by 10.1 percent to 697 million In North America, operating profit declined by euros. The restructuring charges incurred in the year 7.7 percent (7.2 percent after adjusting for foreign under review amounted to 56 million euros (2005: 24 exchange) in the wake of the Dial foods business di- million euros), these figures being integrated within vestment. Return on sales decreased by 1.0 percentage the function costs. points to 11.7 percent. From a still low base, operating profit in the Latin Other Operating Charges and Income America region increased by 46.2 percent (40.8 percent The balance of other operating charges and income after adjusting for foreign exchange). All our business increased by 103 million euros to 208 million euros. sectors contributed to this growth, particularly Henkel This rise is due to certain exceptional items. Included Technologies and Consumer and Craftsmen Adhesives. in other operating income are profits from the sale of Return on sales improved by 1.3 percentage points to the Dial foods business amounting to 16 million euros 6.4 percent. and from the divestment of our insulating glass seal- The Asia-Pacific region also succeeded in posting a ant and rubber-to-metal bonding chemicals businesses further increase in profitability: operating profit grew amounting to 41 million euros. A further increase oc- by 30.0 percent (27.4 percent after adjusting for foreign curred due to the assignment of claims relating to a exchange). In this region, too, Henkel Technologies suc- hereditary building lease to Henkel Trust e.V. in the ceeded in registering a significant increase in profits. At amount of 43 million euros. Exceptional charges of

Henkel Annual Report 2006 35 Group Management Report

13 million euros were also recognized in income, of Net earnings in million euros1) which amount 9 million euros was incurred in the form of payments to Germany’s Pension Guarantee 1,000 871 Association due to the legally prescribed switch to the 770 800 748 capital coverage system. 629 571 600

Financial Items 400 The financial items total decreased by 2 million euros to –122 million euros. While income from our par- 200 ticipation in Ecolab Inc., USA (accounted for by the 0 equity method) increased by 11 million euros, other income from participations decreased by a net amount 2002 2003 2004 2005 2006 of 47 million euros compared to the previous year. This 1) comparable values before goodwill amortization was primarily due to the valuation of our stake in the Japanese corporation Lion, which was divested in the Dividends and Distribution Policy year under review. While this investment appreciated In view of the positive earnings performance, the pro- by 22 million euros in 2005 due to favorable develop- posal to be put to the Annual General Meeting will be ments in the Lion share price, a value impairment of for a 14 eurocent increase in dividends payable on both 26 million euros had to be charged in 2006. classes of share. Amounts of 1.50 euros per preferred Net interest expense improved by 34 million euros share and 1.44 euros per ordinary share will yield a pay- despite the higher interest rates prevailing. This was out ratio of 25 percent. The payout ratio is calculated on primarily due to first-time gains from the plan assets the basis of earnings after minority interests. The level established in the previous year to fund our German of dividend distribution is primarily aligned to profit de- pension obligations, an improvement in the net result velopments, and should generally be about 25 percent of foreign currency gains and losses, and reduced net of the earnings figure after adjustment for exceptional debt. items and deduction of minority interests.

Net Earnings Earnings Per Share (EPS) Earnings before tax increased by 12.9 percent to 1,176 Basic earnings per share are calculated by dividing earn- million euros. Taxes on income amounted to 305 mil- ings after minority interests by the weighted average lion euros. At 25.9 percent, the tax rate is 0.2 percentage number of shares outstanding during the reporting pe- points below the level of the previous year. riod. Earnings per preferred share rose from 5.31 euros Net earnings for the year increased by 101 million in 2005 to 5.98 euros in 2006. Earnings per ordinary euros to 871 million euros. After deducting minority share increased from 5.25 euros to 5.92 euros in the interests of 16 million euros, earnings totaled 855 mil- same period. lion euros. The Stock Incentive Plan introduced in 2000 re- The annual financial statements of Henkel KGaA sulted in a slight dilution of earnings per preferred are summarized on page 115. share as at December 31, 2006, as the options from all five tranches were “in the money”. This effect derives from 357,050 preferred shares that could potentially

36 Henkel Annual Report 2006 Group Management Report

Preferred share dividends in euros Earnings per preferred share in euros1)

1.501) 5.98 6 1.5 1.36 1.30 5.24 5.31 1.20 1.2 1.12 4.34 4.03 4 0.9

0.6 2

0.3

0 0

2002 2003 2004 2005 2006 2002 2003 2004 2005 2006

1) proposed 1) comparable values before goodwill amortization flow back into the market. The resultant dilution in Assets and Financial Analysis EPS amounts to 4 eurocents as compared to basic earnings per share. Acquisitions and Divestments Having acquired the leading brands Right Guard, EVA® and ROCE Soft & Dri and Dry Idea from Gillette, representing In fiscal 2006, the Henkel Group achieved a positive total projected sales for the full year of around 193 mil- EVA® amounting to 402 million euros, doubling the lion euros, the Cosmetics/Toiletries business sector has

prior-year figure of 201 million euros. This resulted now entered the deodorant/antiperspirant segment in Group Management Report from a combination of positive developments in oper- North America. We also acquired Jasminal of Tunisia, ating profit and a lower cost of capital as compared to the market leader in that country for hair care prod- the previous year. We also generated an improvement ucts. The total value of the acquisitions made within in the ROCE ratio – from 13.3 percent to 14.5 percent. Cosmetics/Toiletries was 326 million euros. These metrics show that Henkel is well positioned for The Consumer and Craftsmen Adhesives business ongoing profitable growth: Henkel generates value sector further expanded its building adhesives busi- added. All our business sectors achieved a positive EVA® ness in Europe through the acquisition of the Cim- outcome in the year under review. For explanations of sec brand marketed in Austria and Hungary, and the EVA® and ROCE, see page 30 f. establishment of a joint venture in Kazakhstan. We

EVA® and ROCE by business sector in million euros Consumer and Laundry & Cosmetics/ Craftsmen Henkel Home Care Toiletries Adhesives Technologies Corporate Group EBIT 449 359 209 370 –89 1,298 Capital employed 2,959 2,328 1,239 2,409 24 8,955 WACC (10 %) 296 233 124 241 2 896 EVA® 2006 153 126 85 129 –91 402 EVA® 2005 83 81 55 86 –104 201 ROCE 2006 (in %) 15.2 15.4 16.9 15.4 – 14.5 ROCE 2005 (in %) 13.6 14.7 15.6 14.7 – 13.3

Henkel Annual Report 2006 37 Group Management Report

also acquired Alba Adesivos, Brazil, with annual sales 2006 capital expenditures in million euros of around 30 million euros. In all, Consumer and Continuing Acquisi- Craftsmen Adhesives spent 35 million euros on the operations tions Total purchase of new businesses in the year under review. Property, plant and equipment 431 20 451 In order to focus more on their respective core ac- Intangible assets 47 365 412 tivities, our Laundry & Home Care business sector sold Total 478 385 863 the Armour foods business of Dial in the USA, and Henkel Technologies divested both the insulating glass sealant business operated by Teroson, Heidelberg, and In 2007, spending on property, plant and equipment our Chemosil business (rubber-to-metal bonding chemi- will continue to be focused on Europe and North Amer- cals). The proceeds from these divestments amounted ica. Major investment projects in the Laundry & Home to 200 million euros. Care business sector will include production facilities for the manufacture of innovative products combined Capital Expenditures with measures for further process optimization. The Capital expenditures (excluding financial assets) in business sector Consumer and Craftsmen Adhesives fiscal 2006 totaled 863 million euros. Investments in intends to construct another building adhesives pro- property, plant and equipment for our continuing op- duction plant in Russia. Henkel Technologies intends erations amounted to 431 million euros, 38 million to primarily invest in new production technologies euros more than in 2005. A large slice of this spend aimed at further increasing efficiency and expanding went into establishing and expanding production ca- our capacities in Asia. pacities. A further portion was allocated to structural improvements such as merging certain administrative Balance Sheet Structure and production operations, and the standardization Compared to the previous year, the balance sheet to- of information systems. The major individual projects tals fell by 598 million euros to 13,346 million euros. implemented in 2006 were as follows: On the assets side, the decrease under the non-current >> Commissioning of production facilities for liquid heading was primarily due to lower intangible asset detergents in Lomazzo, Italy, and Genthin, Germany values. Despite the addition of further brand rights (Laundry & Home Care) and goodwill, arising primarily from the acquisition of >> Construction and commissioning of a distribution the deodorant brands Right Guard, Soft&Dri and Dry center for detergents in Genthin, Germany (Laundry Idea from Gillette and the purchase of Alba Adesivos, & Home Care) intangible assets fell in value by 173 million euros be- >> Relocation and expansion of our production site in cause, in the year-on-year comparison of closing rates, Chile (Consumer and Craftsmen Adhesives) the US dollar depreciated by 14 cents. There was a slight >> Expansion of our soldering powder production ac- increase in property, plant and equipment, with invest- tivities with relocation to Yantai, China (Henkel ments in our continuing operations (431 million euros) Technologies) exceeding scheduled depreciation (282 million euros) >> Merging of two factories in Oak Creek, USA (Henkel plus the negative currency translation effect. Financial Technologies) assets decreased by 116 million euros. While the investment in our associate Ecolab Inc. continued to show posi- In regional terms, the emphasis of our capital expendi- tive developments, we divested our participation in the tures in 2006 lay in Europe and North America. Japanese company Lion Corporation in the fall of 2006.

38 Henkel Annual Report 2006 Group Management Report

Under current assets, inventories underwent a slightly Current liabilities fell by 283 million euros. There was higher rise than that of sales, while the increase in a decrease in short-term borrowings, and particularly trade accounts receivable was significantly lower. The commercial papers, totaling 393 million euros. This acquisition of the Gillette deodorant brands was fi- reduction was partially offset by an increase of 161 nanced from our own resources. Year-on-year liquid million euros in trade accounts payable. funds decreased by 283 million euros. Following the The consolidated balance sheet of the Henkel Group sale of the Dial foods business, a major portion of the can be found on page 71. assets held for sale has now been divested. Despite a negative currency translation impact Cash Flow Statement of 486 million euros, shareholders’ equity once again At 1,131 million euros, cash flow from operating grew, by 148 million euros to 5,547 million euros. activities was 123 million euros lower than in the pre- The increase was due primarily to net earnings of vious year. Earnings before interest, tax, depreciation 871 million euros. In addition, option-holders exercised and amortization (EBITDA) increased by 152 million their purchase rights, resulting in a further rise of euros. This figure reflects higher profits from divest- 47 million euros. Aside from the foreign exchange ef- ments and disposals of non-current assets, the proceeds fects, shareholders’ equity was also diminished by divi- of which are recognized under investing activity. The dend payments amounting to 202 million euros. Of the increase in net working capital represents an outflow net earnings for the year, an amount of 641 million euros of 164 million euros. The increase in inventories, trade was transferred to revenue reserves. The equity ratio accounts receivable and trade accounts payable is due rose from 38.7 percent to 41.6 percent. to the expansion in sales volume. Non-current liabilities fell by 463 million euros. Cash flow from investing activities/acquisitions

This includes a significant decrease in pension provi- decreased by –68 million euros to –546 million euros, Group Management Report sions of 273 million euros. The pension obligations reflecting the increase in acquisition activity in 2006 that exist in Germany have, since the previous year, (400 million euros) compared to 2005 (85 million euros). been ring-fenced in a Contractual Trust Arrangement At 478 million euros, investments in continuing opera- (CTA). The assets of Henkel Trust e.V. were increased by tions were also 42 million euros higher than the prior- an inpayment of funds and the assignment of claims year figure. Of this amount, Laundry & Home Care ac- relating to a hereditary building lease. This result- counted for 145 million euros, Cosmetics/Toiletries for ed in a corresponding further reduction in pension 55 million euros, Consumer and Craftsmen Adhesives provisions. for 67 million euros, Henkel Technologies for 158 mil-

Balance sheet structure in million euros Assets Shareholders’ Equity and Liabilities of which in %13,94413,346 13,346 13,944 of which in %

Property, plant and equipment/ 55 57 42 39 Shareholders’ equity Intangible assets 8 6 Pension provisions Financial assets 5 17 5 4 17 Long-term borrowings Other non-current assets 4 6 7 1) 10 Other non-current liabilities Current assets 26 28 8 Short-term borrowings 21 19 Liquid funds/Marketable securities 9 7 Other current liabilities

2005 2006 2006 2005 1) including assets held for sale

Henkel Annual Report 2006 39 Group Management Report

lion euros, and the Corporate segment for 53 million sion obligations, and hence a good overall financial euros. These outflows were offset by proceeds from position. The interest cover ratio increased due to the the divestment of the Dial foods business and of the higher operating profit before depreciation and the non-core businesses of Henkel Technologies, and from improvement in net interest expense, while the rise the sale of other assets. in the equity ratio underlines the stability of our net At –758 million euros, cash flow from financing assets position. activities shows a significantly lower negative balance than the figure for the previous year (–1,468 million Employees euros). The continuing process of reducing our debt resulted in an outflow of 194 million euros. The change in The number of people employed by the Company at borrowings recognized in the previous year contained the end of the year under review was 52,292. the proceeds of the hybrid bond amounting to approx. In the course of the year, the headcount fell by 273. 1.3 billion euros, which were offset by the initial allo- Around 80 percent of our employees work outside Ger- cation of funds to the Contractual Trust Arrangement many. Per capita sales increased by 6.4 percent to 246,300 (Henkel Trust e.V.). Payments into the CTA in the year euros, and Henkel Group payroll costs increased by 78 under review amounted to 188 million euros. million euros to 2,351 million euros. The payroll cost Boosted by the divestments and disposals mentioned, ratio – this describes the relationship between personnel free cash flow – shown before capital expenditures on costs and sales – fell from 19.0 to 18.5 percent. financial assets/acquisitions and before dividends paid Further details relating to our personnel structure – amounted to 786 million euros, 102 million euros can be found on page 107 in the Notes to the Consoli- higher than in the previous year. After adjusting for the dated Financial Statements. utilization of provisions for our Advanced Restructur- In 2006, our German sites hired 167 new trainees ing measures, free cash flow increased by a further and apprentices. This corresponds to a plus of 14 per- 97 million euros to 883 million euros. cent compared to the previous year. As a result, there The detailed cash flow statement can be found on are 473 trainees and apprentices under contract in page 72. Germany, receiving tuition in 26 chemical, engineering and commercial professions. At our Düsseldorf site, we Key Financial Ratios have in recent years been able to offer almost all our Our key financial ratios underwent a further improve- apprentices and trainees full-time positions. ment in 2006. The debt coverage and gearing ratios In the field of training and qualification, we imple- reflect the decrease in borrowings and reduced pen- mented a project to extend our control capability and

Key financial ratios 2005 2006 Interest coverage ratio (EBITDA / net interest expense including interest element of pension provisions) 7.1 9.4 Debt coverage ratio (net earnings before minority interests + amortization and depreciation + interest element of pension provisions / net borrowings and pension provisions)1) 39.9 % 48.4 % Equity ratio (equity / total assets) 38.7 % 41.6 % Gearing (net borrowings and pension provisions / equity) 0.68 0.58

1) hybrid bond included on 50 % equity basis

40 Henkel Annual Report 2006 Group Management Report

increase the effectiveness of our educational activities. We also submit our image to systematic examination This project won us first place in the “2006 Initiative in terms of its effect on recruitment success. Together Awards for Training and Qualification” jointly orga- with a renowned market research institute, we con- nized by the Association of German Chambers of Indus- ducted a survey targeted at top students and universi- try and Commerce (DIHK), the educational foundation ties in Europe. The results reaffirmed our strategy for Otto-Wolff-Stiftung and the German business weekly attracting personnel. “Wirtschaftswoche”. Our worldwide success is based on a multi-cultural Further points of emphasis in our HR policy related and international management approach. Among man- to the issues of diversity, talent management and em- agerial staff, the proportion of non-German personnel ployer image. now amounts to over 70 percent. In all, we have around Our approach to diversity is holistic in nature, 9,100 managers from 80 different countries working with the Company regarding the differences between for Henkel. employees in terms of their age, origin and gender as Since 2004, we have been conducting regular providing further opportunities for business success. management surveys and subjecting the results to Using a new digital “Diversity Cockpit” we are now an external global comparison. With a participation able to quickly generate a clear overview of the most of 85 percent, the latest survey held in 2006 enjoyed important global data and indices relating to this is- the highest response ratio to date. Importantly, the re- sue. One example of such an index shows that we have sults indicated clear improvements under the headings succeeded in increasing the proportion of women in Corporate Values and Ethical Understanding. Our man- managerial functions to 24.6 percent; however, this is agerial staff also appear to be thoroughly cognizant an area in which further effort is required. with and committed to our Vision, our Values and our

Our talent management system enables us to iden- Code of Conduct. Group Management Report tify at an early stage young potentials from around the As in all areas at Henkel, we have consolidated and world, to provide them with specific support and to harmonized the IT systems, databases and processes deploy them to optimum effect within the Company. applicable to our HR management activities. Now, all Innovative and effectively coordinated HR management our worldwide personnel management systems are to instruments ensure systematic employee development be merged within a corporate-wide and uniform master as well as cogent career and succession planning. All data system in order to provide efficient support to our line managers and senior personnel are involved in this front line business units operating in our markets. process, irrespective of their position in the hierarchical In our North American business, we realigned and structure, function or region. As a result, the associated harmonized the remuneration system including all issues receive the appropriate priority, support and at- company benefits. tention throughout the entire organization.

Employees (as of December 31) 2002 % 2003 % 2004 % 2005 % 2006 % Europe/Africa/Middle East 34,736 71.5 34,189 70.3 33,692 65.8 33,731 64.2 33,799 64.7 North America 4,474 9.2 4,181 8.6 6,772 13.2 7,271 13.8 6,651 12.7 Latin America 3,042 6.2 3,946 8.1 4,325 8.5 4,208 8.0 4,297 8.2 Asia-Pacific 6,386 13.1 6,312 13.0 6,411 12.5 7,355 14.0 7,545 14.4 Total 48,638 100.0 48,628 100.0 51,200 100.0 52,565 100.0 52,292 100.0

Henkel Annual Report 2006 41 Group Management Report

Purchase volumes: Raw materials, packaging and Purchase volumes by material type merchandise by business sector

Henkel Laundry & Finished goods 18 % Technologies 31 % Home Care 34 % Raw materials 57 %

25 % Consumer Packaging and Craftsmen Cosmetics/ Adhesives 18 % Toiletries 17 %

Procurement and Production The 2006 financial year saw a continuation of the tense situation in the markets for raw materials and packag- We have significantly improved our purchasing organi- ing. The overall cost of raw materials, auxiliaries and zation and processes, enabling us to effectively meet the supplies, plus packaging, merchandise and outside challenges of the raw material markets and to support services increased to 5.6 billion euros (2005: 5.0 billion our businesses with an increasingly international pres- euros). This rise resulted from higher production vol- ence. For this we have formed global purchasing teams umes and price increases for individual raw materials, who are responsible for sourcing Henkel’s external but was ameliorated by globally coordinated activities purchases. These teams work on a cross-divisional and designed to reduce purchase costs. cross-discipline basis and are aligned to the strategies Our five most important raw material groups ac- of the business sectors. count for around 15 percent, and the five most impor- Appropriate best-practice methods have been devel- tant sup pliers for about 14 percent, of our procurement oped for strategic procurement, supplier relationship volume. management, purchase order handling and business With the improvements achieved and the program intelligence. These methods were first tested in rela- for further optimization of our purchasing activities, we tion to individual material groups and have now been have created a new, competitive platform for meeting applied to all material groups and regions. E-procure- the challenges arising out of our volatile and strained ment solutions and improved delivery processes are procurement markets. intensively utilized in order to reduce the cost of order Henkel has production sites in 52 countries around handling – for example in Europe where already over the world. Our largest facility is in Düsseldorf where 60 percent of our purchase orders for indirect materials we manufacture detergents and cleaning products as are handled using e-tools. To support these worldwide well as adhesives for the DIY and craftsmen segment sourcing activities, we have also developed and imple- and products for our industrial customers. mented a new, global purchase information system. The purpose of all our activities is to achieve op- Research and Development timum exploitation of the opportunities arising in a global procurement market, to apply the best purchas- Expenditure on research and development at Henkel ing tools and processes and, by working together with amounted to 340 million euros in the year under the most efficient and best-performing suppliers, to review, compared to 324 million euros in 2005. The satisfy the requirements of our business sectors. share of sales (R&D ratio) thus remained unchanged at

42 Henkel Annual Report 2006 Group Management Report

R&D expenditures in million euros R&D expenditures by business sector

400 340 Corporate 12 % 324 Laundry & Home Care 27 % 300 272 259 257

200 Henkel Technologies 37 % Cosmetics/ Toiletries 15 % 100 Consumer and Craftsmen Adhesives 9 % 0

2002 2003 2004 2005 2006

Laboratories in Japan, contribute significantly to our R&D ratio 2.7 % 2.7 % 2.6 % 2.7 % 2.7 % innovation strength through their work in the fields (research expenditures as a proportion of sales) of nanotechnology, skin research and functional poly- mers. All results are transferred to the business sectors 2.7 percent. Of the total, we spent 41 million euros on to provide new possibilities for portfolio expansion. corporate research and 299 million euros on the prod- Our scientists are currently working on the follow- uct and process development activities of the business ing projects, among others: sectors. As an annual average, the number of employees >> Development of innovative enzymes for achieving

working in research and development at the Company’s specific improvements in laundry power Group Management Report sites around the world remained unchanged at 2,800, >> Avoidance of biofilms and harmful microbiological the majority being deployed in Germany and the USA. effects in the household, in cosmetics and in techni- In China, we are currently expanding our Shanghai cal applications facility as a central research site for all four of our >> Development of innovative hygiene concepts for business sectors. anti-microbial products and surfaces, and for pres- We utilize all the worldwide resources of R&D infor- ervation systems mation available to us in order to secure the success of >> Investigations into the principles governing biomo- the Company going forward. We marshal both internal lecular actives capable of influencing hair growth, and external expertise for the purpose of strengthen- structure and graying ing and extending our product portfolio and develop- >> Development of new technologies for hair color- ing new markets. Through their work, our scientists ation, hair styling and hair care and engineers lay the basis for tomorrow’s success, >> Development of innovative composites for employ- safeguarding the innovation capabilities and earning ment in aircraft engineering and the electronics power of Henkel into the future. industry Our more long-term corporate research activities >> Prediction of toxicological properties using com- are conducted within a worldwide scientific network. puter-aided models In addition to our Corporate Research unit in Düssel- >> Optimization of production processes through the dorf, our research companies SusTech in Darmstadt application of new automation technologies and Phenion in Düsseldorf, and also Henkel Kindai

Henkel Annual Report 2006 43 Group Management Report

Phenion, our research company for cellular biology and Important R&D sites1) biotechnology, was transferred from Frankfurt/Main to Düsseldorf (both Germany) in the fall of 2006, and Dublin, Ireland Hamburg, Germany Düsseldorf, Germany realigned as a competence center for skin research. One of its particular focal areas is the development Rocky Hill, USA of alternatives to animal testing – for example on the Scottsdale, USA Shanghai, China basis of skin models – for the toxicological evaluation of raw materials. In order to accelerate the validation of such substitute methods by the legislators, Henkel and Phenion are participating in the project “European Partnership for Alternative Approaches to Animal Test- ing” (EPAA). With 2006 being Henkel’s first Year of Innovation, 1) ranked by number of R&D employees the staff of Corporate Research and our operational research and development units have been working We also – for the 25th time since 1982 – selected a num- hard on evaluating the R&D related suggestions ar- ber of exemplary research and development projects for riving from around the world and, converting them the “Fritz Henkel Award for Innovation”. In 2006, this into innovative and improved products or technologies accolade went to four interdisciplinary project teams where appropriate. in recognition of their efforts in the realization and As in previous years, Corporate Research achieved commercialization of the following concepts: some outstanding results in 2006. For the third time >> Vernel and Silan Aromatherapy: This fabric softener since 2004, we have selected a number of exempla- with essential oils not only softens laundry but also ry projects for our “Research/Technology Invention imbues it with a fascinating fragrance. Awards”. Each of the prize-winning projects provides >> Gliss Kur Total Repair 19: A high-performance for- Henkel with new potential for business development mula with 19 active ingredients restructures the or cost reduction: hair and protects its surface. >> Chrome-free primer: >> Thomsit XXL: Very low-emission floor leveling com- A resource-conserving and environmentally compound that creates mirror-smooth surfaces for in- patible corrosion protection system (primer) for stallation of floorcoverings and parquet. metal pretreatment in aircraft construction has >> P3 Disperse for LCD Color-Filter-Cleaning: A series been developed. of highly concentrated, water-based specialty clean- >> HELIOZ (Henkel Line Optimization Planning ers for the manufacture of high-performance color Cockpit) filters for LCD flatscreens. HELIOZ is an innovative, mobile diagnostic and planning tool with which Henkel optimizes packaging We protect our technologies around the world through lines in production quickly, easily and reliably. more than 8,000 patents. We also have over 5,000 >> Systems for controlling industrial fermentation patent applications pending, and we possess more (BioChips): than 2,000 registered designs safeguarding our intel- This project involves the development of a DNA- lectual property. based diagnostic tool for monitoring fermentation Further information on our research and devel- processes, e.g. in the production of enzymes for opment activities can be found on our website at Henkel laundry detergents. www.henkel.com/innovation.

44 Henkel Annual Report 2006 Group Management Report

Marketing and Distribution Our Consumer and Craftsmen Adhesives business sector serves a wide range of customer groupings, and these We align our marketing and distribution activities in have to be individually addressed through a properly each business sector to the specific requirements of differentiated distribution structure. For the most our customers. part, users of our products are not supplied directly At Laundry & Home Care, our marketing activities but rather via the trade. While supermarkets, DIY stores are controlled from headquarters and the regional and specialty retailers are essential to the private user, competence centers. Our sales activities are managed professional craftsmen tend to purchase from various on a country-specific basis and coordinated at the re- types of specialty wholesalers. We only supply direct gional level. to certain major building projects. For Henkel as a sup- Our direct customer grouping in this business sec- plier of leading brand products, communication with tor is the grocery retail trade representing distribution end users is also of critical importance. In the case of channels in the form of supermarkets, mass merchan- the private consumer, we primarily use media adver- disers/hypermarkets and discount stores. In Western tising with complementary point-of-sale activities. As Europe, drug stores are also extremely important, while high-volume users, professional craftsmen are served in the markets outside Europe and North America, a and supported directly by our field sales organization large proportion of sales continues to be channeled with technical advice, product demonstrations and via wholesalers and distributors. As the trade’s first training courses. point of contact, the Sales unit provides a full range In the Henkel Technologies business sector, too, our of competences in serving our customers. marketing and sales activities are closely aligned to In marketing, however, we focus on the require- the different requirements of the individual market

ments of the end consumer. Our Marketing unit initi- segments. The major, globally active automobile manu- Group Management Report ates innovation processes and applies knowledge ac- facturers, for example, are centrally supported by key quired from market research and analysis activities. account management teams. In view of the fact that It also develops and implements media strategies and the metals and electronics industries are extensively advertising formats aligned to the consumer. global in structure, our marketing activities serving the At the Cosmetics/Toiletries business sector, our market- associated markets are controlled from a centralized ing strategies are centrally planned and globally imple- base. For segments with a more local alignment – for mented with respect both to our consumer brands example the graphics industry and the furniture or and the hair salon products business. Our distribution the food industries – the region concerned carries the activities, on the other hand, are managed according to responsibility for the associated marketing activities. national criteria. Consumers are primarily addressed Brands play a decisive role not only in the consumer through media advertising and point-of-sale activities. goods but also in the capital goods sector. Consequently, Consumers purchase our products via the retail trade, we focus our marketing activities there too specifically and the main distribution channels are specialist drug on our major and global brands. stores, grocery outlets and department stores. Our Our customers in the form of industrial users and customers in the hair salon business are served by a manufacturers are supplied both directly and also via dedicated field sales force on the basis of product dem- a network of distributors. Particularly in the industrial onstrations and the provision of technical advice. We maintenance, repair and overhaul sector, and also in further offer specialist seminars and training courses the field of automobile repair and maintenance, we at our 44 Schwarzkopf Academies around the world. have at our disposal an established pool of engineering

Henkel Annual Report 2006 45 Group Management Report

wholesalers who are able to exert a considerable influ- Day in, day out, people put their trust in Henkel brands ence on what our end customers buy. As a premium and technologies in more than 125 countries around supplier, our main aim is to provide our customers with the world. First-class quality means not only ease of competent advice and to deliver to them products and application and high product performance but also services of a constantly high standard of quality. comprehensive product safety and environmental compatibility. Consequently, right from the initial research Sustainability and product development stages, we ensure that, when used as intended, our products and technologies are Henkel is dedicated to sustainability and corporate safe and have no adverse effects on either health or social responsibility. We clearly state this principle as the environment. one of the corporate values binding on all our employ- Henkel thus also supports the basic objective un- ees. We generate sales and profits while behaving in derlying the legislative initiative of the European Com- a socially responsible manner in all our activities and mission, known by the acronym REACH, to register, along the entire value chain. We are in no doubt that evaluate and authorize all chemicals and to limit their effective environmental protection and good corporate application as appropriate. The legal process surround- citizenship are, in the long-term view, essential to our ing REACH was completed in December 2006; however, entrepreneurial success. many details relating to its implementation remain The Henkel Management Board bears full responsibil- open. In order to limit the additional costs generated ity for the Company’s sustainability policy. A Sustainabil- by REACH, Henkel has already introduced new, and ity Council controls our global activities in collaboration modified existing processes, preparing the Company in with our operating business sectors, the regional and good time for the future requirements likely to arise. national companies and our corporate functions. Under REACH, Henkel’s role is primarily that of a In signing the “Global Compact” of the United Na- user of chemicals. On the basis of our current know- tions in July 2003, we also made public our commitment ledge of REACH and the likely requirements arising to uphold human rights, including the basic rights of from the new legislation, we envisage being able to in- employees, to promote environmental protection and tegrate the necessary capability for evaluating product to oppose all forms of corruption. Our understanding ingredients within our existing assessment processes. of socially responsible behavior has been specifically As we are also affected by REACH in our capacity as detailed for the entire Company through our “Code of an importer and manufacturer of chemicals, from Corporate Sustainability” and our “Code of Conduct”. 2009 we will incur additional costs for the registra- These codes apply together with our more detailed tion of imported and self-manufactured substances. internal SHE standards governing safety, health and The licensing requirements for especially hazardous environmental protection, our Social Standards and substances are unlikely to impact Henkel products in our Group Purchasing Guidelines. Adherence to these the Laundry & Home Care and Cosmetics/Toiletries requirements and regulations is regularly examined by business sectors, and should hardly affect the products corporation-wide internal audits. In addition, Henkel of our Consumer and Craftsmen Adhesives business companies have their management systems externally sector. Such substances are today already absent from certified where such procedures give rise to competi- Henkel’s consumer products. Certain licensing require- tive advantage. At the end of 2006, 55 percent of our ments may arise with respect to the products of our production volume was generated at sites certified in Henkel Technologies business sector. Working groups accordance with the worldwide environmental man- with members from across the Company are involved agement standard ISO 14001. in ensuring that, once the REACH requirements come

46 Henkel Annual Report 2006 Group Management Report

into force, the necessary procedures can be quickly and We have also been able to reduce energy consumption efficiently implemented. This includes communication as a function of production volume, with optimized with our commodity suppliers and the customers of production processes resulting in a decrease of 27 per- our technical products, as well as the pre-registration cent. Such savings help to compensate for the increase of raw materials. in energy prices and – due to the associated reduction The implementing regulations for REACH need to in carbon dioxide emissions – in attainment of the be pragmatically drafted. Henkel is actively involved at climate protection targets of those countries in which the European level in the preparation of corresponding we are active. proposals. The focus here is on ensuring that prod- As a responsible corporate citizen, we provide finan- ucts can be evaluated with efficient processes on the cial and material support for projects aligned to social basis of the individual assessments of the ingredients welfare, the environment, education, science, health, employed. sport, art and culture. These contributions emanate For many years, Henkel has been using ingredients both from central sources within Henkel and from based on renewable raw materials with a view to gener- our local sites. ally optimizing product characteristics where feasible Since 1998, moreover, we have been active in sup- under ecological, economic and social criteria. Such porting the voluntary work performed by our employ- renewable raw materials are also key constituents in our ees and retirees. In 2006, under our worldwide MIT glue sticks, wallpaper pastes, packaging adhesives, deter- initiative (= Make an Impact on Tomorrow), Henkel gents and body wash products. In the case of our Pritt supported a total of 1,191 charitable projects, of which Stick, for example, such substances make up around 262 were children’s projects, in more than 100 differ- 90 percent of the dry mass, while the proportion of re- ent countries.

newable raw materials in our surfactants for detergents Future-viable solutions geared toward sustainable Group Management Report and cleaning agents lies in the region of 35 percent. In development can only be found in consultation and col- order to become less dependent on petroleum-based raw laboration with all social groupings. In order to be able materials over the long term, Henkel is working on the to take into consideration and evaluate the interests of development of further high-performance ingredients these different communities on a case-by-case basis, we derived from renewable raw materials. constantly seek dialog with all our stakeholders at the Our achievements in relation to sustainability and local, regional and corporate level. These include our corporate social responsibility have also been recog- employees, shareholders, customers, suppliers, public nized by external organizations. Once again, we have authorities, trade associations and non-governmental been incorporated in various international ethical in- organizations, as well as science, academia and the dexes such as the Dow Jones Stoxx Sustainability and public at large. the FTSE4Good. As in 2004, Henkel took first place in We first published our annual Environment Report the Oekom Corporate Responsibility Rating for the in 1992. This was replaced in 2001 by our annual Sus- consumer goods industry in 2006. tainability Report. With this, we document the high Once more in the year under review, we were able priority assigned to sustainability by the Company to improve on significant indicators that characterize while at the same time satisfying our Global Compact our sustainability performance. Worthy of particular reporting obligations. Further information, reports, mention is the decline in work-related accidents by background details and the latest news on sustainable 72 percent over the last five years, evidencing the ef- development at Henkel can be found on our website ficacy of our occupational health and safety programs. www.henkel.com/sustainability.

Henkel Annual Report 2006 47 Our brands excel thanks to Innovation, Quality, Trust and Added Value

1907 Henkel invents Persil, the first self-acting detergent

2007 Henkel invents “Persil Futurino” – centennial symbol and innovative liquid bottle in one 200722007 – 1001000 YeYearssso off PPerPersi esssil Group Management Report: Laundry & Home Care

Laundry & Home Care

Key financials1) Sales in million euros in million euros 2005 2006 Change

4,088 4,117 Sales 4,088 4,117 0.7 % 4,000 3,617 Proportion of Henkel sales 34 % 32 % – 2 pp 3,131 3,074 3,000 Operating profit (EBIT) 433 449 3.7 %

2,000 Return on sales (EBIT) 10.6 % 10.9 % 0.3 pp Return on capital employed 1,000 (ROCE) 13.6 % 15.2 % 1.6 pp EVA® 83 153 85.3 % 0 pp = percentage points 2002 2003 2004 2005 2006

1) calculated on the basis of units of 1,000 euros

Organic sales growth of 4.6 percent categories acquired through Dial and Clorox. We intend to continuously expand our global market position Operating proﬁ t further increased on the basis of our leading position in Europe. In this ROCE raised to 15.2 percent strategy, regional growth takes precedence over the development of additional product categories. Economic environment and market position Great importance will attach to driving organic The world market for laundry and home care prod- sales growth and continuing the increase in pro- ucts underwent further dynamic expansion, with the fitability in the next few years. We are concentrating

markets of relevance for us growing by more than 3 on achieving further growth in our largest markets of Group Management Report percent. Market growth was more price-driven than in Western Europe and North America, and on further previous years because – unlike in 2005 – it became pos- increasing return on sales in the growth regions. The sible to pass on raw material cost increases by raising main factors here will be our innovation capability product prices. As a consequence, the decline of the last and the continued strengthening of our international few years encountered in our largest market, Western brands. Europe, was reversed to produce gratifying growth. In North America, too, there was a tangible price-driven Sales and profits upswing in the market dynamics, with a considerable Despite having divested the Dial foods business, we were expansion in sales. Of the other major markets, Russia able to exceed our prior-year sales figure by 0.7 percent recorded the highest market growth rate. to 4,117 million euros. Organic growth was a highly en- Against this background, the Laundry & Home Care couraging 4.6 percent. We were able to further expand business sector once again occupied leading global our market position in the Europe/Africa/Middle East positions in the markets of relevance for us. Sales development in percent Business activity and strategy 2006 In keeping with our focus on the laundry and home Change versus previous year 0.7 care product markets, in the year under review we Foreign exchange –0.2 divested the North American foods business acquired After adjusting for foreign exchange 0.9 Acquisitions/Divestments –3.7 with Dial. We pursue a selective market coverage ap- Organic 4.6 proach with the air freshener and insecticide business

Henkel Annual Report 2006 49 Group Management Report: Laundry & Home Care

region. In Western Europe including Germany, business Return on capital employed (ROCE) rose by 1.6 percent- activity picked up from the second quarter, i.e. once the age points to 15.2 percent. We achieved this through trade and consumers had accepted the price increases ongoing optimization of our net working capital and implemented at the beginning of the year. We achieved the release of capital arising from the sale of the Dial the highest growth rate of all our regions in Eastern Eu- foods business. rope, with both good market development and the expansion of our market positions contributing. Our sales Market segments performance was particularly encouraging in Russia, Both market segments, namely laundry and home care, and also in Poland and Ukraine. In Africa/Middle East, contributed to organic growth. Within the laundry seg- too, we achieved double-digit growth rates, although ment, our heavy-duty detergents benefited particularly developments were mixed: in countries such as Algeria from the implemented price increases, which were and Tunisia, where we already occupy leading market additionally supported by an advertising campaign for positions, we grew in line with the market, while in Purex in the USA and the European anti-gray relaunches other countries such as Iran or Egypt, we achieved a of our premium brands. Our special detergents under- disproportionate expansion in our business. went even faster growth than the heavy-duty detergents. In North America, the successfully implemented This was due, among other things, to further market price increases and good performance of our air fresh- penetration in the growth regions Africa/Middle East ener business contributed to strong growth in organic and Latin America. In Europe, it was the successful sales. Aromasoft and Aromatherapy campaigns instituted for We increased operating profit (EBIT) to 449 million our fabric softeners under the Vernel and Silan brands euros. This corresponds to a rise of 3.7 percent, which that primarily contributed to the encouraging sales is higher than the rate of sales growth. performance. In the relaunch of Persil with a touch Raw material and transportation costs continued of Vernel, we combined the strengths of two success- to increase through 2006. However, with a worldwide ful brands for the first time. The rise in the share of cost reduction program, we succeeded in compensat- sales accounted for by our premium brands and our ing for major portions of this cost hike. As a result, we profitable special detergents had a positive effect on were able to utilize a portion of our price increases for the profitability of the segment. expansion in our advertising and promotional activities In the case of the home care segment, our dishwash- while also further improving return on sales. This grew ing products were particularly successful. In Western by 0.3 percentage points to 10.9 percent. Europe, design-oriented innovations such as the Pril

50 Henkel Annual Report 2006 Group Management Report: Laundry & Home Care

Funny Man and technological advancements as with in Genthin, Germany; to improve site safety, we in- Somat 5 were the main contributors. In Eastern Europe stalled an explosion protection system that meets the and the other growth regions, we achieved a double- increased requirements imposed by the introduction digit percentage increase in sales as a result of stronger of a new EU directive. In all, we invested 139 million market penetration and the introduction of higher-end euros in property, plant and equipment compared to products. Worthy of particular note is the success of 132 million euros in the previous year. Pril in India. Here, where dishwashing is traditionally done with solid bar soaps, we were the first market Outlook participant to introduce a liquid dishwashing detergent We expect the markets of relevance to us to expand by into the market and have been able to maintain this between 2 and 3 percent in 2007. The scope for increas- lead even against strong competition. We also achieved ing our product prices will, however, decrease, not least above-average growth with our air fresheners. In this due to the increase in value added tax in Germany category, we are primarily represented by the brands and easing economic activity in the USA. On the other of Dial in North America, which we are also now se- hand, we expect raw material and transportation costs lectively introducing into other countries. The growth to undergo no more than a moderate increase. is particularly attributable to successful new launches Against this background, we expect organic sales and strong selling and distribution performance in growth in 2007 to be above the market average, accom- North America. There we were also able to generate panied by a further increase in operating profit. substantial increases in sales as a result of the revamp of We see particular opportunities arising from con- our household cleaner Soft Scrub. The best performance tinued dynamic development in the Eastern European in Western Europe was achieved by our WC products, markets, especially Russia, and in the sustained market

particularly our WC rim blocks. Following the Fresh recovery taking place in Western Europe. Thanks to Group Management Report Surfer design version developed in collaboration with our strong market position in both regions, we can Alessi, the Wild Kayak was also well received by the look forward to benefiting disproportionately from trade and consumers alike. these developments. The primary risks lie in a further increase in price competition in the European and Capital expenditures North American markets. Because of our presence in The main areas of investment were warehousing Africa/Middle East, we are also becoming increasingly technology, packaging technology and site safety. As exposed to political risks. Another risk lies in the ongo- examples, we invested in a large regional warehouse ing concentration of retail customers.

Henkel Annual Report 2006 51 Our brands excel thanks to Innovation, Quality, Trust and Added Value

Our innovative products introduced in the hair cosmetics market underline the hair competence of the Schwarzkopf umbrella brand and in 2006 resulted in record market shares in all segments. Group Management Report: Cosmetics/Toiletries

Cosmetics/Toiletries

Key financials1) Sales in million euros in million euros 2005 2006 Change 3,000 2,864 Sales 2,629 2,864 8.9 % 2,629 2,477 2,500 Proportion of Henkel sales 22 % 22 % – 2,116 2,086 2,000 Operating profit (EBIT) 321 359 11.7 % 1,500 Return on sales (EBIT) 12.2 % 12.5 % 0.3 pp 1,000 Return on capital employed

500 (ROCE) 14.7 % 15.4 % 0.7 pp ® 81 126 55.7 % 0 EVA pp = percentage points 2002 2003 2004 2005 2006

1) calculated on the basis of units of 1,000 euros

Organic sales growth of 4.1 percent Throughout the world, the Cosmetics/Toiletries business sector holds leading positions in the markets of Operating proﬁ t increased by relevance for us. 11.7 percent ROCE raised to 15.4 percent Business activity and strategy The Cosmetics/Toiletries business sector is active both Economic environment and market position in the branded consumer goods segments of hair The growth of the world cosmetics market of relevance cosmetics, body care, skin care and oral care, and in

for Henkel was around 2 percent in fiscal 2006. Devel- the hair salon business. Our intention is to further Group Management Report opment of the highly competitive Western European expand the branded consumer goods business with branded consumer goods market remained sluggish. a regional focus. The emphasis will be on developing Nevertheless, we achieved above-average growth in this our strong market positions in Europe, increasing mar- region. Boosted by our positive performance in the hair ket development in North America and implementing cosmetics segment and the body care business, we were carefully selected activities in Asia. We are continuing able to expand our market positions and gain market our globalization strategy in the hair salon business. share. Eastern Europe, Asia-Pacific and Latin America We intend to achieve growth primarily through the exhibited stronger market growth, in which we suc- organic expansion of our businesses and especially cessfully participated. The North American market through the development and rapid market launch underwent a slight upturn. In North America, we sub- of innovative products. We will continue looking at stantially expanded our position in the body care seg- appropriate acquisitions to accelerate business expan- ment through acquisition of the brands Right Guard, sion and supplement organic growth. In our branded Soft & Dri and Dry Idea from Gillette. consumer goods business, we are concentrating on There were positive developments in the international hair salon market. Here again, the growth Sales development in percent drivers were the markets of Eastern Europe and Latin 2006 America. As a globally aligned, innovative salon special- Change versus previous year 8.9 ist, Schwarz kopf Professional enjoyed above average Foreign exchange –0.2 participation in this development. After adjusting for foreign exchange 9.1 Acquisitions/Divestments 5.0 Organic 4.1

Henkel Annual Report 2006 53 Group Management Report: Cosmetics/Toiletries

the international expansion of our core activities in rise, stronger than that of sales, is primarily due to cost hair cosmetics and body care. At the focus of our hair savings in production and administration achieved cosmetics strategy is the continuous development of within the framework of our successful program of our leading umbrella brand Schwarzkopf and our core optimization measures, supplemented by the results competences in colorants and styling. In body care, we attributable to Right Guard. Through formulation and will continue our innovation offensive, further build- packaging improvements, we succeeded in limiting the ing on our latest market successes in Europe. In North impact arising from the slight increase in raw mate- America, we are concentrating on expanding our core rial prices that occurred. Consequently, we were able brand Dial and the newly acquired Right Guard busi- to improve return on sales by 0.3 percentage points to ness. In extending our skin care brand Diadermine, 12.5 percent. and also in the further development of our oral care At 15.4 percent, return on capital employed (ROCE) activities, we will be concentrating on Europe. Our was 0.7 percentage points above the level for the previ- hair salon business, currently the number three in ous year. the world, is to be further strengthened with product innovations. Here we also want to develop new regional Market segments potential on a selective basis. The strategic focus of our branded consumer goods Our strategy of expanding and further strengthen- business in 2006 was on hair cosmetics and body care. ing our core businesses and core competences is aligned We were able to generate substantial sales growth in the to the objective of achieving further, continuous im- hair cosmetics business with our top brands in the colo- provement in profitability. rants, hair care and styling segments leading the way. In the colorants category, our brands Palette, Natural & Sales and profits Easy and Brillance performed well. We have extended In the year under review, sales increased by 8.9 percent the Brillance range with a new Brillance toner. Also to 2,864 million euros. Organic growth versus prior year under the Brillance brand, we launched the subline was a substantial 4.1 percent. Our branded consumer Luminance designed to provide dark hair with an in- goods business in Western Europe expanded consider- tensive shine and a range of in-vogue colors. We ex- ably faster than the market, and in Eastern Europe we panded the product family marketed under the Diadem were able to continue our strong performance with a brand through the launch of a permanent-color roots double-digit increase. There was also expansion in the retoucher. In the hair care segment, we concentrated on Middle East and Latin America. Our sales performance the activities of Gliss Kur and Schauma. As part of the in North America was characterized by expansion in Gliss Kur Repair line, we launched a new concept onto our Dial business and the successful integration of the market under the name Repair 19. In addition, we the brands acquired from Gillette. Our hair salon busi- introduced under the Gliss brand our Repairist Kit, the ness likewise exhibited growth far above that of the first 3-stage hair treatment for home use comprising a market. shampoo, a treatment lotion and a gloss finish. In line At 359 million euros, operating profit (EBIT) was with the trend toward intensive care, we augmented 11.7 percent above the figure for the previous year. This the Schauma range with a new variant in the form of

54 Henkel Annual Report 2006 Group Management Report: Cosmetics/Toiletries

Schauma Repair & Care. In the styling segment, we under review. Following the revamp of the brand as a revamped the Taft brand and also the trend styling “Hairtherapy” product in 2005, this year we extended brand Taft Looks. Our new gel innovation Taft Titane the range through the inclusion of the two product performed very successfully. The European roll-out of series BC Sun and BC Men. We further developed the got2b was further extended in 2006. Indola brand through the introduction of Innova, a We were successful in further developing our body new care and styling line. care business. Our Fa brand posted strong sales growth with the innovations Fa Yogurt and Fa Asia Spa. Addi- Capital expenditures tional impetus was provided by the range and design The investment focus in 2006 was on measures to op- relaunch of our deodorants. The Dial brand was able timize our structures and processes. We continued to further expand its position in the North American our work in reorganizing our production activities in body wash market thanks particularly to the successful Asia and developing further production structures in introduction of the Dial for Men line. Our activities in Russia. In total, expenditures on property, plant and North America were also extended through the acquisi- equipment for the year amounted to 49 million euros tion and successful integration of the Gillette brands compared to 45 million euros in 2005. already mentioned. In the skin care business, we introduced a new Outlook generation of anti-aging care products in the form of We expect the world cosmetics market of relevance Diadermine Global Action 9, formulated to combat to us to expand by around 2 percent in 2007. North all the signs of skin aging. Within the skin creams America and Eastern Europe are likely to be the growth category, our Diadermine Lift+ continued to perform drivers for our business. Market expansion in Western

well. Europe is expected to be limited, with competition Group Management Report In the oral care segment, we achieved good results remaining intensive. with our Theramed dispensers and also with our new We expect organic sales growth in 2007 to be above Theramed 2in1 3D Clean, formulated to provide anti- the market average. Our objective is to expand our bacterial cleaning action for the teeth, gums and market positions, particularly in Europe and North tongue. America. The core of our growth strategy is provided In the hair salon business, we concentrated our ac- by our ongoing innovation offensive. We again expect tivities on the relaunch of the colorant Igora Royal to achieve an increase in operating profit. and our styling brand OSiS. New pigments and care We see opportunities primarily arising from our substances incorporated into the Igora Royal range participation in the disproportionate expansion of the served to optimize color uniformity, coverage and in- markets of Eastern Europe and Latin America, and in tensity while also offering good miscibility. The OSiS further reducing our production, supply chain and brand underwent substantial further development administration costs. The risks lie in increasing compe- with product and packaging innovations aligned to tition in what are already highly competitive markets, its creative brand core. The BC Bonacure brand con- and in additional raw material price increases. tinued to show very positive development in the year

Henkel Annual Report 2006 55 Our brands excel thanks to Innovation, Quality, Trust and Added Value

Professional and private users appreciate all the benefits that Ceresit brings – it’s easier, safer, suitable for a wider range of applications, offers higher quality and can be relied upon to produce exactly the right results – both indoors and out. Example: the dust-reduced tile adhesive Ceresit CM 90 Group Management Report: Consumer and Craftsmen Adhesives

Consumer and Craftsmen Adhesives

Key financials1) Sales in million euros in million euros 2005 2006 Change

2,000 1,977 Sales 1,742 1,977 13.5 % 1,742 Proportion of Henkel sales 15 % 16 % 1 pp 1,500 1,446 1,317 1,313 Operating profit (EBIT) 185 209 13.0 %

1,000 Return on sales (EBIT) 10.6 % 10.6 % – Return on capital employed 500 (ROCE) 15.6 % 16.9 % 1.3 pp ® 55 85 55.9 % 0 EVA pp = percentage points 2002 2003 2004 2005 2006

1) calculated on the basis of units of 1,000 euros

Organic sales growth of 7.8 percent for bonding and sealing in both internal and external building applications. With differentiated products for Operating proﬁ t increased by home and professional users, we can therefore offer the 13.0 percent market a truly comprehensive portfolio. ROCE raised to 16.9 percent Our activities in the market for adhesives and adhesive tapes for home, school and office are aligned to our Economic environment and market position extensively established international brands Pritt (bond- The dynamics of the markets served by the Consumer ing and correction) and Loctite (cyanoacrylates). Expan-

and Craftsmen Adhesives business sector remained sion in these businesses is primarily organic, driven by Group Management Report largely unchanged in 2006. Although world market innovation and ongoing internationalization. growth averaged around 3 percent, substantial regional In the case of our adhesives and sealants for con- differences again occurred. Continuing stagnation in struction, DIY and craftsmen, by far the greatest market our traditional core markets in Western Europe con- potential is in the market segment serving professional trasted with strong growth in Eastern Europe and Asia. users, i.e. craftsmen. Consequently, expansion of this The highest growth rates occurred in the construction- segment is of particular importance for us. In addition, related market segments. a strong position in the craftsmen market provides us The process of consolidation within the competi- with a competitive advantage in the DIY business. In tive environment continued through 2006. Due to the many emerging economies, moreover, there is still no fragmentation of the competition and the high level significant DIY market. Expansion in these markets can of importance of local suppliers, there were more take- therefore only be achieved via the craftsmen business. overs by major, internationally active corporations. In keeping with the dual growth strategy pursued over The Consumer and Craftsmen Adhesives business the years, organic business expansion will continue sector occupies a leading position in its market worldwide. Sales development in percent 2006 Business activity and strategy Change versus previous year 13.5 The business sector focuses on the two market segments Foreign exchange 0.3 adhesives and adhesive tapes for home, school and After adjusting for foreign exchange 13.2 office; and adhesives and sealants for construction, Acquisitions/Divestments 5.4 DIY and craftsmen. The Henkel product range in these Organic 7.8 categories covers all the relevant problem solutions Henkel Annual Report 2006 57 Group Management Report: Consumer and Craftsmen Adhesives

to be supplemented by selective acquisitions. Major The main driver of our organic growth was once again acquisitions in the year under review included Alba Eastern Europe; however, our businesses in Latin Adesivos, the market leader for craftsmen adhesives America, Asia and the Middle East also performed well in the important Brazilian market, and the Cimsec above average. Growth in Western Europe, on the other business with which we have further expanded our hand, was lower due to market conditions. In North position in the strategically important tile adhesives America, our performance was influenced by weaken- segment in Austria and the neighboring markets in ing demand. Eastern Europe. The high increases in the costs of raw materials and The market segments served by cyanoacrylates, mod- packaging in 2005 were followed in 2006 by further ern assembly adhesives, sealants and building adhesives – although less strident – rises. We responded to these are particularly attractive for Henkel. We will therefore developments with price increases of our own, albeit be providing these areas with above-average levels of implemented with a degree of delay. In addition, we investment. invested in marketing activities and in the sales orga- We intend to further expand our businesses in the nizations serving our growth markets. Through these growth regions outside Western Europe with the focus measures, we achieved above-average growth while also on Eastern Europe, Asia and Latin America, North Africa enhancing our future competitiveness. Consequently, and the Middle East. We are able to call upon proven we were able to increase operating profit (EBIT) by business models enabling initial market entry and sub- 13.0 percent to 209 million euros. As in the previous sequent expansion of our activities in such regions. year, return on sales was 10.6 percent. Thanks to further Here, the acquisition of strong local sup pliers and the net working capital optimization, we succeeded in in- involvement of local partners constitute important creasing return on capital employed (ROCE) to 16.9 per- elements of our approach. cent compared to 15.6 percent for the previous year. Gaining innovation leadership in the market segments that we serve is a key strategic objective. Our Market segments ability to effectively identify individual customer needs One of the priorities in the adhesives and adhesive tapes for provides the basis for the development of new, market- home, school and office segment lay in updating the entire aligned solutions, and we therefore place high priority range of cyanoacrylates on an international scale with on the associated research. In our product development substantially improved product formulations. With a activities, we share common technology platforms with globally standardized advertising campaign accom- Henkel Technologies. panied by a comprehensive range of sales promotion activities, we successfully strengthened this product Sales and profits group, uniformly marketed under the Loctite brand, Sales underwent an encouraging increase of 13.5 per- enabling us to substantially extend its position as an cent to 1,977 million euros in the year under review. international leader. The performance of our paper We succeeded in increasing organic sales by 7.8 percent, adhesives and correction products marketed under enabling us once again to grow significantly faster than the Pritt brand was influenced by difficult market the market in 2006. conditions.

58 Henkel Annual Report 2006 Group Management Report: Consumer and Craftsmen Adhesives

In the adhesives and sealants for construction, DIY and crafts- Capital expenditures men segment, we further expanded our sealants busi- Our capital expenditures in 2006 focused on the cre- ness in line with our strategy. We were able to quickly ation of new production capacities in the growth integrate the Rhodia sealants business, acquired at markets outside Western Europe. In addition, we pur- the end of 2005, into our existing European activities. posefully improved the competitiveness of our existing Moreover, using the technology acquired from Rhodia, sites. At 58 million euros, investments in property, we developed new and innovative sealing products and plant and equipment were above the 2005 figure of introduced these into the market. 50 million euros. Adhesives and sealants based on the Henkel-owned FLEXTEC technology were further established interna- Outlook tionally in the year under review. FLEXTEC products We expect market growth in 2007 to be around are characterized by their high performance, universal 3 percent. suitability and easy application, and are hence supe- We anticipate a slight upturn in our traditional rior to conventional products. We will further expand European core markets. For North America, on the our FLEXTEC-based range and roll out the associated other hand, we foresee the market downturn encoun- products to other countries. tered in the second half of 2006 continuing, with the Our building adhesives business once more per- construction-related businesses likely to be particularly formed very well, with the strongest impetus again affected. coming from Eastern Europe where we have now We do not expect any sustained relaxation in the opened additional production facilities. Further fac- prices for raw materials and packaging but anticipate tories are under construction as we endeavor to meet lower rates of increase than in 2006.

the rapidly increasing demand for our products. In We expect organic sales growth in 2007 to be above Group Management Report the case of our fastest-selling building adhesives line, the market average. We foresee a further increase in namely our tile adhesives, we have set new standards operating profit with measures for reducing manufac- in the market with the introduction of a new, dust- turing cost, optimizing our overhead expense structure reduced product. With up to 90 percent less dust being and pro-active portfolio management making a posi- produced during usage, it ensures cleaner handling tive contribution. One of the priorities for 2007 will and better user protection. be to achieve further improvements in net working Our building heat insulation product systems like- capital. wise underwent dynamic growth in Eastern Europe We see opportunities emanating in particular from during the year under review. Such solutions can also ongoing business expansion in the growth regions, our be applied in modified form for insulating buildings in planned product launches and potential supplementary hot climates in order to reduce the energy consumption acquisitions. Risks relate to future upward movements caused by air-conditioning systems. In this new, attrac- in raw material prices, the possibility of ongoing negative market segment, we achieved our first successes tive trends in the North American housing construction in the Gulf region. market, and increased competitive pressures arising from further market consolidation.

Henkel Annual Report 2006 59 Our brands excel thanks to Innovation, Quality, Trust and Added Value

Loctite® Instant Adhesives – bond in seconds

For more than 50 years, our Loctite products have been delivering exceptional quality. Now our new generation of Loctite® instant adhesives – developed in 2006 – have added a further dimension in excellence with • even faster, even stronger bonding of plastics • bonds of even higher toughness on a wide variety of materials • outstanding convenience • low-odor application and minimized bloom Click-lock – for enhanced safety

New nozzle – for precise and High elasticity with exceptional product metering controlled application control – easy-squeeze bottle

The superiority of the Loctite range derives from outstanding product quality Group Management Report: Henkel Technologies

Henkel Technologies

Key financials1) Sales in million euros in million euros 2005 2006 Change 3,750 3,533 3,266 Sales 3,266 3,533 8.2 % 3,000 Proportion of Henkel sales 27 % 28 % 1 pp 2,763 2,666 2,791

2,250 Operating profit (EBIT) 345 370 7.2 % Return on sales (EBIT) 10.6 % 10.5 % – 0.1 pp 1,500 Return on capital employed 750 (ROCE) 14.7 % 15.4 % 0.7 pp

® 0 EVA 86 129 49.1 % pp = percentage points 2002 2003 2004 2005 2006

1) calculated on the basis of units of 1,000 euros

Organic sales growth of 8.9 percent Business activity and strategy Henkel Technologies offers adhesives, sealants and sur- Operating proﬁ t increased by 7.2 percent face treatment products for a wide range of sectors, ROCE raised to 15.4 percent industries and specific engineering applications. Our approach is to combine our advanced technologies Economic environment and market position in devising tailor-made solutions for our customers. The markets of relevance for Henkel Technologies in- Our global presence and comprehensive product port- volving adhesives, sealants and surface treatment prod- folio enable us to provide a full range of services to

ucts for industrial applications once again underwent our internationally active customers. We are continu- Group Management Report positive development in 2006. Ongoing improvements ously extending our leading market positions in high- in the performance of bonding and sealing technologies growth markets – particularly in Eastern Europe and further consolidated the trend toward replacement of Asia – through regional expansion based on organic mechanical fixing and conventional joining techniques growth and selected acquisitions. Our above-average with such systems. performance – particularly in the fields of research In the year under review, the market grew by around and development, production and process technology, 3 percent overall, with all our segments showing posi- supply chain management and marketing, selling and tive progress. As in the previous year, growth in the distribution – provide the cornerstone for our close and electrical engineering and electronics industries was durable customer relationships. above average. The paper and packaging industries underwent significant expansion and there was also Sales development in percent a further increase in global automobile production, 2006 with particularly strong growth in the Asian market. Change versus previous year 8.2 While the metals industry was only able to expand to Foreign exchange –0.1 a small degree, the markets for consumer durables and After adjusting for foreign exchange 8.3 Acquisitions/Divestments –0.6 industrial maintenance, repair and overhaul solutions Organic 8.9 exhibited high growth rates. Henkel Technologies occupies a leading market position which we further consolidated in 2006 by once again achieving an organic growth rate well above the market average.

Henkel Annual Report 2006 61 Group Management Report: Henkel Technologies

Sales and profits Market segments In the year under review, the Henkel Technologies busi- The transportation market segment continued to per- ness sector increased sales by an encouraging 8.2 perform very well, with our automobile-related business cent to 3,533 million euros. This is primarily attribut- expanding in all our regions. In the difficult North able to strong organic growth amounting to 8.9 percent. American automotive market, we were able to expand With double-digit growth rates, Eastern Europe, Latin our business with the Asian manufacturers producing America and Asia-Pacific continued to develop particu- in that region. The new Teroson product line for sound larly well. However, we also achieved good growth in insulation and our high-performance adhesives for Western Europe and North America. Operating profit bonding windshields in place proved to be successful. rose by 7.2 percent to 370 million euros, thanks largely With another increase in aircraft production figures to the strong organic increase in sales. Due to further and more and more adhesives and sealants being used increases in the cost of our raw materials and the tense in aircraft construction, we were also able to further situation affecting North America’s automobile manu- expand our business serving that industry. facturers, return on sales remained at 10.5 percent, the Continuing high levels of demand for electronic level posted in the previous year. components contributed to the growth of our business Of the 41 million euros in profits arising from the with the electronics industry. With our lead-free solder sale of our insulating glass sealant and rubber-to-metal pastes, we were able to profit from a new EU directive bonding chemicals businesses, 30 million euros was promoting their application. In China, we expanded utilized to expand our core businesses, to improve our our production capacity with our joint venture, Huawei, procedures and processes and to reorganize our selling and also extended our development center in Yantai. and distribution activities. In the steel industry we have specifically aligned our Return on capital employed (ROCE) increased by activities toward the trend favoring more environmen- 0.7 percentage points to 15.4 percent, achieved through tally compatible products. Our innovative chrome-free the increase in operating profit and a reduction in net coating and passivation products under the Granocoat working capital. brand showed highly promising development. We also benefited from strong growth in the Asian market.

62 Henkel Annual Report 2006 Group Management Report: Henkel Technologies

Once again, we posted encouraging growth in the system which, as a competence center, will effectively consumer durables market segment, especially with our increase our competitiveness in the region. innovative products such as Bonderite NT for metal Investments in property, plant and equipment for pretreatment applications. Further contributions came 2006 totaled 149 million euros compared to 140 mil- from our innovative polyurethane hotmelt adhesives lion euros in 2005. under the Purmelt brand and our 3D dispersion adhesives formulated for the woodworking and furniture Outlook industries. We expect market growth to again be around 3 per- Our business with packaging for the consumer goods cent in 2007. We also anticipate that our individual segment continued to perform well, driven by a new segments will undergo developments similar to those generation of Liofol laminating adhesives with reduced encountered in 2006. solvent content and improved curing behavior. We expect raw material prices to remain high, Demand for our products serving the industrial main- although the rates of increase are likely to be lower tenance, repair and overhaul segment remained very high. than in 2006. Because we have not been able to fully The global relaunch of our instant adhesives under the compensate for the rapid and high increases in raw Loctite brand contributed to disproportionate growth. material prices that have taken place in recent years, With the Loctite University, we now offer our customers we intend to further adapt our own prices in 2007. In and distributors a web-based information and training addition, we are endeavoring to further optimize our platform specifically aligned to our products. formulations, taking account of new raw materials as they become available. Capital expenditures We expect organic sales growth in 2007 to again

Our investments are primarily aligned to improving be above the market average, accompanied by another Group Management Report our manufacturing processes and strengthening our increase in operating profit. presence in the growth markets. We see opportunities in the further substitution of We made considerable progress in improving effi- existing mechanical fixing and joining technologies by ciency on the basis of a number of individual projects. adhesive bonding, and in even faster rates of market At our Düsseldorf site, for example, we succeeded in growth in Asia and Eastern Europe. We see risks aris- implementing a single, central monitoring and control ing in the likely future development of raw material system serving spatially separated production lines. In prices and in the possibility of a general slowdown in our new Asian headquarters in Shanghai, we are in the economic activity. process of establishing a modern research and training

Henkel Annual Report 2006 63 Group Management Report

Opportunity and Risk Report subprocesses incorporated within the opportunity and risk management system and the risk control process Integrated Opportunity and Risk Management are supported by an intranet-based database that en- System and Risk Control sures transparent communication of the relevant in- By applying unified corporate standards, we systemati- formation throughout the Company. cally incorporate opportunities and risks in our planning and decision-making processes. As opportunity Disclosure of Major Individual Risks and risk are essentially the two sides of entrepreneurial The following explains in more detail the main indi- endeavor, opportunities generally arise from a comple- vidual risks and risk categories identified within the mentary view of the operational and functional risk overall exposure as represented by the risk inventory. structure arising in all risk categories. Consequently, Relevant opportunities together with relevant risks are we are able both to minimize potential exposure at described in the “Outlook” section on page 68 and in an early stage and to specifically target and effectively the individual business sector reports starting on page exploit identified opportunities. Our opportunity and 51 in this Group Management Report. risk management system is an integral component of Economic and sector-specific risks: Our business the comprehensive planning, control and reporting development is influenced not least by the dynamics regime that we have implemented in the individual of the world economy. Consequently, economic de- companies, in our business sectors and at corporate velopments and long-term trends relating to relevant level. The principles, processes and responsibilities regions are continuously analyzed. Our appraisal of relating to risk management are defined in a Corpo- these underlying worldwide trading conditions and rate Standard that is binding throughout the Group. the immediate prospects for the future are indicated Within the framework of the 2006 financial audit, the on page 68. auditors examined the structure and function of the Also of substantial importance for our business sec- opportunity and risk management system, confirming tors are developments affecting the consumer goods its adequacy and regulatory compliance. market and also the automotive, electronics, steel, me- An important basis of our global risk control capa- tals and construction industries. Sector-specific risks bility is provided by periodically instigated risk inven- and opportunities are separately discussed on page tories, within the scope of which risks and opportu- 68 and also in the business sector reports starting on nities are systematically identified, documented and page 51. evaluated. The involvement of the regional managers Research and technology risks: We minimize our in the reporting process ensures that risks in our inter- research and technology risks through a system of in- national organization are comprehensively monitored house fundamental research augmented by extensive and recorded. Within the framework of a risk inven- information interchange with universities and research tory, managerial staff are required to identify risks on institutions. Detailed analytical methods and a strict the basis of checklists using predefined operating and product release procedure are applied in order to en- functional risk categories, and to evaluate the results in sure sound product composition. In addition, our safety terms of occurrence likelihood and potential loss. and environmental standards lay down Group-wide, We regularly analyze the development of invento- parameter-based criteria for ensuring the high quality ried risks and the efficiency of risk management mea- of our products. sures in a separate risk control process implemented In view of the redrafting of the new European legis- at both a centralized and decentralized level. All the lation regarding the registration, evaluation and autho-

64 Henkel Annual Report 2006 Group Management Report

rization of chemicals (REACH), we have already aligned individual suppliers so as to better secure the constant our existing processes to future requirements – as far availability of the goods and services that we require. as currently known – in order not least to minimize We enter into strategic partnerships with suppliers of the ensuing additional costs. important and price-sensitive raw materials in order Innovation processes: Innovative products consti- to minimize the concomitant price risks. The basis for tute a major factor governing the success of our Compa- successful risk management in this domain is provided ny. Through comprehensive marketing analyses, taking by a comprehensive procurement information system into particular account customer requirements, and that ensures permanent transparency of our purchas- through modern methods of innovation management, ing volumes. We also maintain interdisciplinary teams we ensure that the risks are minimized and that the (research and development, supply chain management corresponding chances of a successful product launch and purchasing), the remit of which is to devise alter- are maximized. In this process, we are able to rely on a native formulations and to develop different forms of professional idea management process and also care- packaging in order to be able to respond to unforeseen fully conducted laboratory tests. fluctuations in raw material prices. Investment risks: Decisions relating to capital Production risks: Risks in the field of production spending on property, plant and equipment are aligned are minimized by ensuring a high level of employee to defined, differentiated responsibility matrices and qualification, establishing clearly defined safety stan- approval procedures that incorporate all the relevant dards and carrying out regular plant and equipment specialist functions and are regulated in an internal maintenance. The negative effects of possible produc- code of practice. This requires that capital expenditures tion failures can be offset through flexible produc- be analyzed in advance on the basis of a detailed risk tion control and are covered by economically feasible

appraisal. Further auditing and analytical exercises insurance policies. Group Management Report accompanying projects at the implementation stage Credit risks: Having instituted our global credit provide the basis for successful project management policy, we minimize bad debt and the loss of receivables and effective risk reduction. through standardized procedures, a pro-active credit Acquisition risks: Acquisition decisions are es- management regime and the use of payment default sentially made on the basis of a comprehensive risk insurance policies and guarantees. Aside from detailed analysis and in line with procedures specified in our local monitoring, we also monitor our key customer corporate standards. In complex transactions, risks relationships at the global level. can arise due to laws and statutory instruments relat- Personnel risks: The future economic development ing, for example, to tax, competition, monopolies and of Henkel is essentially secured by the commitment the environment. To counteract these, we base our and capabilities of our employees. We respond to the decisions on a comprehensive process of due diligence increasing competition for well-qualified technical backed up by legal advice provided both by our own and managerial staff by maintaining close contacts experts and by external specialists. This also applies with selected universities and implementing special to divestments. recruitment programs. Attractive qualification and Procurement market risks: In the procurement further-training opportunities combined with perfor- market, pro-active control of our vendor portfolio, and mance-related compensation plans form the basis of our globally active, cross-divisional purchasing manage- our personnel development system. ment system contribute considerably to reducing risk. IT/data security risks: Henkel has put in place a We operate a strict policy of remaining independent of globally binding internal IT code of practice to which

Henkel Annual Report 2006 65 Group Management Report

our external service-providers are also bound. Major In order to minimize credit risk, we select as our con- components of this code include measures for avoiding tract partners only those German and international risk, an appraisal of escalation processes and a descrip- banks that, in compliance with the treasury guidelines tion of best-practice technologies. Correct implementa- of Henkel, are regularly scrutinized for creditworthi- tion is continuously monitored by our globally active ness and the accuracy of their listings. In addition, a Internal Audit function. In addition, our safeguards limit management regime is in place in order to mini- are examined for their efficacy and efficiency by in- mize the risk arising from the failure of a bank. dependent, external specialists. Daily data back-up The liquidity risk affecting the Company can be operations are conducted to shadow all critical stocks regarded as minimal due to the use of long-term fi- of data, and the resultant files are transferred to an- nancing instruments and the availability of additional other site. Regular restore tests are also carried out. liquidity reserves in the form of credit lines. Appropriate approval procedures, authorization pro- The global alignment of our three areas of compe- files and technologies are deployed in order to ensure tence results in two types of currency risk: transaction regulated access to our IT systems. The external attacks risks and translation risks. Transaction risks arise from that occurred in 2006, e.g. in the form of viruses, at- exchange rate fluctuations causing changes in the value tempts at hacking and spamming campaigns, resulted of future foreign currency cash flows with respect to in no disruptions to our business processes because individual company financial statements. Transaction they were successfully repelled by the implemented risks arising from our operating business are actively safety systems and safeguards. managed by Corporate Treasury. This pro-active ap- Financial risks: Interest, currency and liquidity proach includes assessment of the specific currency risk risks are centrally controlled by Corporate Treasury and the development of a coordinated hedging strategy. on the basis of a pro-active management regime. The Negative impact on profits is restricted by strict limi- basis of this control capability is provided by the trea- tation of potential losses. The transaction risk arising sury guidelines introduced by the Management Board from financial items is 100 percent hedged. Transla- which are binding on the entire corporation. Defined tion risks emanate from the changes in a subsidiary’s in these are the targets, principles, competences and equity that can arise from foreign exchange fluctua- jurisdictions of Corporate Treasury. They describe the tions and the effect these have on the translation of fields of responsibility and establish the distribution local individual company financial statements into of these responsibilities between the corporate level Group currency. The risks arising from the translation on the one hand and the subsidiaries on the other. of sales and profits of subsidiaries in foreign currencies, The trading, controlling and handling functions are and from net investments in foreign entities, are only spatially and organizationally separated. Our clear hedged in exceptional cases. regulations on handling financial risks constitute an The interest risk encompasses those potentially posi- important component of Henkel’s financial strategy, tive or negative influences on profits, shareholders’ by which all the financial risks and the liquidity of equity or cash flow for current or future reporting our subsidiaries are centrally controlled. We deploy periods arising from changes in interest rates. The stra- derivative financial instruments exclusively for hedg- tegic deployment of interest-bearing financial instru- ing purposes. Additional information on derivatives ments with the objective of optimizing the net interest and other financial instruments, and also the systems result for the Henkel Group constitutes an important applied for risk control are explained in Note 37 to the component of our financial policy. To this end, we con- Consolidated Financial Statements. trol the maturity structure both by choosing appro-

66 Henkel Annual Report 2006 Group Management Report

priate fixed-interest periods for the original financial We counteract legal risks through corresponding bind- assets and financial liabilities affecting liquidity, and ing guidelines, codes of conduct and training measures. by using interest rate derivatives, predominantly inter- We address current actions and potential litigation est rate swaps. The interest rates both on the bond for risk by maintaining constant contacts between the 1.0 billion euros issued by Henkel KGaA in June 2003 corporate legal department and local attorneys, and and the hybrid bond for 1.3 billion euros issued by also through our separate reporting system. For certain Henkel KGaA in November 2005 were converted from legal risks, we have taken out insurance policies that fixed to floating using interest rate swaps; in the case are standard for the industry and that we consider to of the 2003 bond, conversion was 100 percent and in be adequate. We form provisions for litigations to the the case of the 2005 bond, conversion was 50 percent. extent that it is likely in our estimation that obliga- As the bonds and interest rate swaps are in a formally tions may arise which are either not covered or not documented hedge accounting relationship, the mea- fully covered by our insurance policies and where a surement of the bonds and the measurement of the reasonably accurate estimate of the loss involved is interest rate swaps match exactly in practical terms. possible. Nevertheless, losses can arise from litigations Pension obligations: Pension entitlements are pre- that are not covered by our insurance policies or our dominantly financed by separate, external pension provisions. funds. Major pension funds are managed in Germany, the USA, the UK, Ireland and the Netherlands by ex- Overall Risk ternal fund managers. The investment funds allocated At the time of writing this report, there are no identifi- to cover our pension obligations in Germany are de- able risks relating to further developments that could termined on the basis of an asset-liability study. Here, endanger the existence either of the holding company

the investments are structured so that the risks arising or of the Group as a going concern. Our risk analysis Group Management Report from interest rate changes affecting the level of pension indicates that the net assets, financial position and liabilities are reduced by the expected further devel- results of operations of the holding company and of opment of the interest- and yield-bearing assets. The the Group as a whole are not currently endangered assets allocated in the form of shares and trust units either by individual risks or by the aggregated exposure can impact on the developing value of the pension arising from all risks combined. fund in the event of adverse movements in the stock markets. Account is taken of this risk by ensuring a wide diversification of our investment portfolio. Legal risks: As a globally active corporation, we are also exposed in the course of our ordinary business activities to a range of risks relating to litigations in which we are currently involved or may be involved in the future. These include, in particular, risks arising from the fields of product liability, product defects, laws relating to competition and monopolies, the in- fringement of proprietary rights, and environmental protection. There are currently no risks arising from litigations either pending or threatened that could have a material influence on our financial position.

Henkel Annual Report 2006 67 Group Management Report

Outlook for the Henkel Group Eastern Europe is likely to generate strong momentum within Europe as a whole. Given the strength of 2006, Underlying Conditions we anticipate that the German construction industry will ease back into stagnation in 2007. World Economy The rate of expansion in the world economy is likely to Opportunities and Risks ease slightly compared to 2006, with the differences in Opportunities arise from the generally favorable world the growth rates between the individual regions also economic conditions and the primary trends affecting further declining. our business segments. Our stronger focus on innova- We expect the USA and Europe to grow at roughly tion and our expanding presence in the dynamically the same rate. Overall, the outlook for Western Europe developing growth markets should provide our busi- remains favorable, and we also expect the growth in nesses with further impetus. Germany to continue. Risks for our businesses may arise in the event that There is likely to be a slight decline in the dy namics raw material prices increase by an unexpectedly high of the growth regions such as Eastern Europe, Asia degree and also from further consolidation at the and Latin America, although their development will customer level. A further risk lies in the possibility of continue to be very favorable. rising competition leading to a requirement for higher We anticipate a further slight increase in raw ma- investments in our markets. terial prices, to which we will respond with price in- Further specific opportunities and risks are dis- creases of our own. In our estimate, the euro is likely cussed in the individual business sector reports. to further appreciate slightly with respect to the US dollar. We anticipate interest rates to remain stable in Sales and Proﬁ ts Forecast for 2007 the USA and to increase slightly in Europe. Henkel expects to achieve organic sales growth (i.e. after Sector Developments adjusting for foreign exchange and acquisitions/divest- We expect private consumption in Western Europe to ments) of 3 to 4 percent in 2007. undergo a further positive development. Consumers We expect an increase in operating profit (EBIT) in the USA are, on the other hand, likely to be more – adjusted for foreign exchange – in excess of organic reluctant in their spending as compared to 2006. sales growth. We expect world automotive output to experience We likewise expect an increase in earnings per pre- another increase, particularly in the growth regions. ferred share (EPS) in excess of organic sales growth. The electronics industry is likely to undergo further expansion, albeit to a lesser degree than in 2006. Long-term Sales and Proﬁ ts Forecast We similarly expect the machine construction and the metalworking industries to return to moderate We also expect to generate a rate of organic sales growth growth. The paper and packaging industry will again in excess of the market average in the coming years, provide positive momentum in this coming year. We with operating profit (EBIT) and earnings per preferred anticipate that developments in the US construction share (EPS) rising faster than sales. industry will stabilize in the course of the year, while

68 Henkel Annual Report 2006 Consolidated Financial Statements Subindex

Subindex

Post-Closure Report 70 Consolidated Financial Statements 70 Consolidated Statement of Income We announced the closure of our Spanish cosmetics site 71 Consolidated Balance Sheet in La Coruña to employee representatives at the end of 72 Consolidated Cash Flow Statement December 2006 and to the workforce at the beginning 73 Statement of Recognized Income and of January 2007. Expense At the end of January, Henkel North America decided to analyze the effectiveness and efficiency of the 73 Notes to the Consolidated Financial processes in the finance, personnel and purchasing de- Statements partments and to take appropriate measures as a result. 73 Statement of Changes in Equity The investigation will also examine the concentration of activities in Shared Service Centers and review the 74 Group Segment Information relocation of appropriate sites outside North America, 76 Changes in Intangible Assets, Property, including site closures. Plant and Equipment and Financial Assets 79 Notes to the Consolidated Statement of Income 84 Notes to the Consolidated Balance Sheet 104 Supplementary Information on the State- ment of Income/Balance Sheet 114 Recommendation for Approval of the An- nual Financial Statements and Appropria-

tion of the Profit of Henkel KGaA Group Management Report 115 Annual Financial Statements of Henkel KGaA (summarized) 116 Statement of the Management Board 117 Auditors’ Report 118 Corporate Management of Henkel KGaA

Henkel Annual Report 2006 69 Consolidated Financial Statements

Consolidated Statement of Income

in million euros Note 20051) 2006 Sales 1 11,974 12,740 Cost of sales 2 –6,5491) –6,963 Gross profit 5,425 5,777 Marketing, selling and distribution costs 3 –3,4111) –3,650 Research and development costs 4 –324 –340 Administrative expenses 5 –6331) –697 Other operating income 6 183 298 Other operating charges 7 –78 –90 Operating profit (EBIT) 1,162 1,298 Net income from associated companies 72 83 Net result from other investments 18 –29 Investment income 90 54 Interest income 70 71 Interest expense –280 –247 Net interest –210 –176 Financial items 8 –120 –122 Earnings before tax 1,042 1,176 Taxes on income 9 –272 –305 Net earnings 770 871 Minority interests 10 –13 –16 Earnings after minority interests 757 855

1) Current restructuring costs from 2005 have been allocated proportionately to the relevant functions. See commentary on page 78.

Earnings per share (basic) in euros Note 2005 2006 Ordinary shares 43 5.25 5.92 Non-voting preferred shares 43 5.31 5.98

Earnings per share (diluted) in euros Note 2005 2006 Ordinary shares 43 5.25 5.92 Non-voting preferred shares 43 5.28 5.94

70 Henkel Annual Report 2006 Consolidated Financial Statements

Consolidated Balance Sheet

Assets in million euros Note 2005 2006 Intangible assets 11 5,660 5,487 Property, plant and equipment 12 2,045 2,078 Shares in associated companies 530 496 Other investments and long-term loans 151 69 Financial assets 13 681 565 Other non-current assets 14 223 171 Deferred tax 15 456 363 Non-current assets 9,065 8,664 Inventories 16 1,232 1,325 Trade accounts receivable 17 1,794 1,868 Other current receivables and miscellaneous assets 18 378 436 Current tax assets 121 110 Liquid funds/Marketable securities 19 1,212 929 Assets held for sale 20 142 14 Current assets 4,879 4,682 Total assets 13,944 13,346

Shareholders’ Equity and Liabilities in million euros Note 2005 2006 Subscribed capital 21 374 374 Capital reserve 22 652 652 Revenue reserves 23 4,764 5,362 Gains and losses recognized in equity 24 –419 –901 Equity excluding minority interests 5,371 5,487 Minority interests 25 28 60 Equity including minority interests 5,399 5,547 Pensions and similar obligations 26 1,061 788 Other long-term provisions 27 427 294 Long-term borrowings 28 2,400 2,322 Other non-current liabilities 29 59 126 Deferred tax 30 473 427 Non-current liabilities 4,420 3,957 Short-term provisions 31 932 992 Short-term borrowings 32 1,405 1,012 Trade accounts payable 33 1,333 1,494 Other current liabilities 34 455 344

Current liabilities 4,125 3,842 Financial Statements Consolidated Total equity and liabilities 13,944 13,346

Henkel Annual Report 2006 71 Consolidated Financial Statements

Consolidated Cash Flow Statement

See Note 44 in million euros 2005 2006 Operating profit (EBIT) 1,162 1,298 Income taxes paid –265 –259 Amortization/depreciation/write-ups of non-current assets (excluding financial assets) 334 350 Net gains/losses on disposal of non-current assets (excluding financial assets) –6 –94 Change in inventories 29 –147 Change in receivables and miscellaneous assets 123 –186 Change in liabilities and provisions –123 169 Cash flow from operating activities 1,254 1,131 Purchase of intangible assets –43 –47 Purchase of property, plant and equipment –393 –431 Purchase of financial assets/acquisitions –85 –400 Proceeds on disposal of subsidiaries and business units – 200 Proceeds on disposal of other non-current assets 43 132 Cash flow from investing activities/acquisitions –478 –546 Henkel KGaA dividends –181 –190 Subsidiary company dividends (to other shareholders) –9 –12 Interest received 71 70 Dividends received 20 25 Interest paid –268 –294 Dividends and interest paid and received –367 –401 Change in borrowings 214 –194 Allocation to Contractual Trust Arrangement (CTA) –1,297 –188 Other financing transactions –18 25 Cash flow from financing activities –1,468 –758 Change in cash and cash equivalents –692 –173 Effect of exchange rate changes on cash and cash equivalents 209 –110 Change in liquid funds and marketable securities –483 –283 Liquid funds and marketable securities at January 1 1,695 1,212 Liquid funds and marketable securities at December 31 1,212 929

Computation of free cash flow in million euros 2005 2006 Cash flow from operating activities 1,254 1,131 Purchase of intangible assets –43 –47 Purchase of property, plant and equipment –393 –431 Proceeds on disposal of subsidiaries and business units – 200 Proceeds on disposal of other non-current assets 43 132 Dividends received/Net interest –177 –199 Free cash flow 684 786

72 Henkel Annual Report 2006 Consolidated Financial Statements/Notes to the Consolidated Financial Statements

Statement of Recognized Income and Expense

in million euros 2005 2006 Net earnings 770 871 Foreign exchange effects 602 –486 Derivative financial instruments –36 3 Actuarial gains/losses –140 7 Other gains and losses recognized in equity 39 –9 Shares in associated companies – –83 Gains and losses recognized directly in equity 465 –568 Total earnings for the period 1,235 303 – Minority shareholders 21 44 – Equity holders of Henkel KGaA 1,214 259

Notes to the Consolidated Financial Statements: Statement of Changes in Equity

See Notes 21 to 25 in million euros Gains and losses recognized in equity Derivative Transla- financial Ordinary Preferred Capital Revenue tion dif- instru- Minority shares shares reserve reserves ferences ments interests Total At January 1, 2005 222 152 652 4,286 –995 13 16 4,346 Distributions – – – –181 – – –9 –190 Sale of treasury shares – – – 8–––8 Net earnings – – – 757 – – 13 770 Foreign exchange effects ––––599–3602 Derivative financial instruments ––––––36––36 Actuarial gains (+) and losses (–) – – – –140 – – – –140 Other gains and losses – recognized in equity – – 34 – – 5 39 At December 31, 2005/January 1, 2006 222 152 652 4,764 –396 –23 28 5,399 Distributions – – – –190 – – –12 –202 Consolidated Financial Statements Consolidated Sale of treasury shares – – – 47 – – – 47 Net earnings – – – 855 – – 16 871 Foreign exchange effects –––––485 – –1 –486 Derivative financial instruments –––––3–3 Actuarial gains (+) and losses (–) –––7–––7 Other gains and losses recognized in equity – – – –121 – – 29 –92 At December 31, 2006 222 152 652 5,362 –881 –20 60 5,547

Henkel Annual Report 2006 73 Notes to the Consolidated Financial Statements

Group Segment Information1) by Business Sector

See Note 42 in million euros Laundry Consumer & Henkel & Home Cosmetics/ Craftsmen Tech- Business sectors Care Toiletries Adhesives nologies Corporate Henkel Sales 2006 4,117 2,864 1,977 3,533 249 12,740 Change from previous year 0.7 % 8.9 % 13.5 % 8.2 % – 6.4 % Proportion of Group sales 32 % 22 % 16 % 28 % 2 % 100 % Sales 2005 4,088 2,629 1,742 3,266 249 11,974 EBITDA 2006 579 412 254 472 –69 1,648 EBITDA 2005 550 371 224 452 –101 1,496 Change from previous year 5.3 % 11.2 % 13.1 % 4.4 % – 10.2 % Return on sales (EBITDA) 2006 14.1 % 14.4 % 12.8 % 13.4 % – 12.9 % Return on sales (EBITDA) 2005 13.5 % 14.1 % 12.9 % 13.8 % – 12.5 % Amortization and depreciation of trademark rights, other rights and property, plant and equipment 2006 130 53 45 102 20 350 of which impairment losses 2006 7611116 of which write-ups 2006 1––––1 Amortization and depreciation of trademark rights, other rights and property, plant and equipment 2005 117 50 39 107 21 334 of which impairment losses 2005 3 –18113 of which write-ups 2005 3 – 4 – – 7 EBIT 2006 449 359 209 370 –89 1,298 EBIT 2005 433 321 185 345 –122 1,162 Change from previous year 3.7 % 11.7 % 13.0 % 7.2 % – 11.7 % Return on sales (EBIT) 2006 10.9 % 12.5 % 10.6 % 10.5 % – 10.2 % Return on sales (EBIT) 2005 10.6 % 12.2 % 10.6 % 10.6 % – 9.7 % Capital employed 20062) 2,955 2,328 1,239 2,409 24 8,955 Capital employed 20052) 3,184 2,184 1,186 2,350 –167 8,737 Change from previous year –7.2 % 6.6 % 4.5 % 2.5 % – 2.5 % Return on capital employed (ROCE) 2006 15.2 % 15.4 % 16.9 % 15.4 % – 14.5 % Return on capital employed (ROCE) 2005 13.6 % 14.7 % 15.6 % 14.7 % – 13.3 % Capital expenditures (excl. financial assets) 2006 157 381 112 160 53 863 Capital expenditures (excl. financial assets) 2005 158 53 356 493 37 1,097 Operating assets 20063) 4,295 2,930 1,584 2,978 399 12,186 Operating liabilities 2006 1,174 783 408 848 375 3,588 Net operating assets employed 20063) 3,121 2,147 1,176 2,130 24 8,598 Operating assets 20053) 4,403 2,715 1,471 2,808 307 11,704 Operating liabilities 2005 1,036 710 351 745 474 3,316 Net operating assets employed 20053) 3,367 2,005 1,120 2,063 –167 8,388

1) calculated on the basis of units of 1,000 euros 2) including goodwill at acquisition cost 3) including goodwill at net book value

74 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

Group Segment Information1) by Region

See Note 42 in million euros Europe/ North Africa/ America Middle (USA, Latin Asia- Regions East Canada) America Pacific Corporate Henkel Sales by location of company 2006 8,045 2,742 663 1,041 249 12,740 Change from previous year 7.4 % 0.4 % 16.1 % 11.7 % – 6.4 % Proportion of Group sales 63 % 22 % 5 % 8 % 2 % 100 % Sales by location of company 2005 7,490 2,733 571 931 249 11,974 Sales by location of customer 2006 7,979 2,721 686 1,105 249 12,740 Change from previous year 7.4 % – 16.8 % 12.0 % – 6.4 % Proportion of Group sales 63 % 21 % 5 % 9 % 2 % 100 % Sales by location of customer 2005 7,430 2,721 588 986 249 11,974 EBITDA 2006 1,173 397 61 86 –69 1,648 EBITDA 2005 1,048 435 46 68 –101 1,496 Change from previous year 11.9 % –8.8 % 33.5 % 26.0 % – 10.2 % Return on sales (EBITDA) 2006 14.6 % 14.5 % 9.2 % 8.3 % – 12.9 % Return on sales (EBITDA) 2005 14.0 % 15.9 % 8.0 % 7.3 % – 12.5 % Amortization and depreciation of trademark rights, other rights and property, plant and equipment 2006 216 76 18 20 20 350 Amortization and depreciation of trademark rights, other rights and property, plant and equipment 2005 191 88 17 17 21 334 EBIT 2006 957 321 43 66 –89 1,298 EBIT 2005 857 347 29 51 –122 1,162 Change from previous year 11.7 % –7.7 % 46.2 % 30.0 % – 11.7 % Return on sales (EBIT) 2006 11.9 % 11.7 % 6.4 % 6.4 % – 10.2 % Return on sales (EBIT) 2005 11.4 % 12.7 % 5.1 % 5.5 % – 9.7 % Capital employed 20062) 3,272 4,562 449 648 24 8,955 Capital employed 20052) 3,363 4,487 431 623 –167 8,737 Change from previous year –2.7 % 1.7 % 4.2 % 4.1 % – 2.5 % Return on capital employed (ROCE) 2006 29.3 % 7.0 % 9.5 % 10.2 % – 14.5 % Return on capital employed (ROCE) 2005 25.5 % 7.7 % 6.8 % 8.2 % – 13.3 % Capital expenditures (excl. financial assets) 2006 340 355 51 64 53 863 Capital expenditures (excl. financial assets) 2005 353 626 15 66 37 1,097 Operating assets 20063) 4,941 5,408 539 899 399 12,186 Operating liabilities 2006 2,204 608 111 290 375 3,588 Net operating assets employed 20063) 2,737 4,800 428 609 24 8,598 Operating assets 20053) 4,827 5,226 501 843 307 11,704 Operating liabilities 2005 1,978 517 88 259 474 3,316 Net operating assets employed 20053) 2,849 4,709 413 584 –167 8,388 Consolidated Financial Statements Consolidated

1) calculated on the basis of units of 1,000 euros 2) including goodwill at acquisition cost 3) including goodwill at net book value

Henkel Annual Report 2006 75 Notes to the Consolidated Financial Statements

Changes in Intangible Assets, Property, Plant and Equipment and Financial Assets

Cost in million euros Intangible Property, plant Financial assets and equipment assets Total At January 1, 2005 4,907 4,855 1,061 10,823 Changes in the Group/Acquisitions 564 100 –316 348 Additions 43 393 78 514 Disposals1) –82 –244 –139 –465 Reclassifications 26 –26 – – Translation differences 631 207 15 853 At December 31, 2005/January 1, 2006 6,089 5,285 699 12,073 Changes in the Group/Acquisitions 352 21 –18 355 Additions 47 431 93 571 Disposals1) –18 –258 –179 –455 Reclassifications 5 –5 – – Translation differences –530 –147 –13 –690 At December 31, 2006 5,945 5,327 582 11,854 1) of which assets held for sale 2006 – –10 – –10 1) of which assets held for sale 2005 –72 –60 – –132

Accumulated amortization/depreciation in million euros Intangible Property, plant Financial assets and equipment assets Total At January 1, 2005 353 3,047 23 3,423 Changes in the Group/Acquisitions – 3 – 3 Write-ups – –7 – –7 Scheduled amortization/depreciation 49 279 – 328 Impairment losses 9 4 4 17 Disposals1) –10 –171 –10 –191 Reclassifications –2 2 – – Translation differences 30 83 1 114 At December 31, 2005/January 1, 2006 429 3,240 18 3,687 Changes in the Group/Acquisitions –1 3 –2 – Write-ups – –1 –1 –2 Scheduled amortization/depreciation 53 282 – 335 Impairment losses 3 13 4 20 Disposals1) –16 –220 –2 –238 Reclassifications – – – – Translation differences –10 –68 – –78 At December 31, 2006 458 3,249 17 3,724 1) of which assets held for sale 2006 – –5 – –5 1) of which assets held for sale 2005 – –19 – –19

Net book value in million euros Intangible Property, plant Financial assets and equipment assets Total At December 31, 2006 5,487 2,078 565 8,130 At December 31, 2005 5,660 2,045 681 8,386

The impairment losses are allocated to the relevant functions.

76 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

General information The consolidated financial statements of Henkel KGaA have been prepared in accordance with International Financial Reporting Standards (IFRS). The individual financial statements are drawn up on the same accounting date as those of Henkel KGaA. The financial statements of companies included in the consolidation have been audited by members of the KPMG organization or by other independent firms of auditors instructed accordingly. On January 30, 2006, the personally liable managing partners of Henkel KGaA approved the release of the consolidated financial statements to the Supervisory Board. The Supervisory Board is responsible for reviewing the consolidated financial statements and declaring whether it approves them. The consolidated financial statements have been prepared under the historical cost convention, with the exception that certain financial instruments are stated at their fair values. The Group currency is the euro. Unless otherwise indicated, all amounts are shown in million euros. In order to improve the clarity and informative value of the consolidated financial statements, certain items are combined in the balance sheet and in the statement of income and shown separately in the Notes.

Composition of the Group In addition to Henkel KGaA, the consolidated financial statements at December 31, 2006 include 12 German and 195 foreign companies in which Henkel KGaA has the power to govern the financial and operating policies, based on the concept of control. This is generally the case where Henkel KGaA holds, directly or indirectly, a majority of the voting rights. Companies in which not more than half of the shares are held are fully consolidated if Henkel KGaA has the power, directly or indirectly, to govern their financial and operating policies. The composition of the Group has changed in the course of 2006 compared with the previous year. Eight companies have been included in the consolidated Group figures for the first time, 15 companies were merged and 23 companies are no longer consolidated. The investment in Ecolab Inc., St. Paul, Minnesota, USA, is accounted for using the equity method, because the Henkel Group holds more than 20 percent of the voting rights and has significant influence on the financial and operating policies of the company.

Principal acquisitions by business sector in million euros Holding Financial First in % commitment1) consolidated Consumer and Craftsmen Adhesives Alba Ltda. 100 35 March 31, 2006 Laundry & Home Care, Cosmetics/Toiletries Jasminal S.A.R.L. 66 13 Sep. 30, 2006

1) purchase price (49 million euros) plus debts assumed less cash and cash equivalents assumed (1 million euros)

On April 28, 2006, we acquired certain toiletry brands from Gillette under an asset deal. The purchase price for this business was 315 million euros. Of this amount, 178 million euros related to trademark rights and 8 million euros to property, plant and equipment. The goodwill arising on the acquisition was 129 million euros. In 2006, the business achieved sales of 129 million euros. Consolidated Financial Statements Consolidated Consolidation principles The purchase method is used for the consolidation of capital. This method stipulates that, for business combinations, all hidden reserves and hidden charges in the company acquired are fully reflected at fair value and all identifiable intangible assets are separately disclosed. Any difference arising between the fair value of the net assets and the purchase price is recognized as goodwill. Companies acquired are included in the consolidation for the first time by eliminating the carrying amount of the parent company’s investment in the subsidiary companies against their assets and liabilities. In subsequent years, the carrying amount of the parent company’s investment in the subsidiary companies is eliminated against the current equity of the subsidiary companies.

Henkel Annual Report 2006 77 Notes to the Consolidated Financial Statements

The investment in Ecolab Inc., St. Paul, Minnesota, USA, is accounted for using the equity method. All receivables and liabilities, sales, income and expenses, as well as intercompany profits on non-current assets or inventories supplied by other companies in the Group, are eliminated on consolidation. Intra-Group supplies are on the basis of market or transfer prices.

Currency translation The financial statements of companies included in the consolidation, including the hidden reserves and hidden charges of Group companies reflected under the purchase accounting method, and also goodwill arising on consolidation, are translated into euros using the functional currency method outlined in IAS 21. The functional currency is the main currency in which the foreign company generates funds and makes payments. As the functional currency for the companies included in the consolidation is the local currency of the company concerned, assets and liabilities are translated at the mid rates ruling on the balance sheet date, while income and expenses are translated at average rates for the year. The differences arising from using average rather than year-end rates are taken to equity and shown as “Gains and losses recognized in equity” without affecting earnings. Foreign currency accounts receivable and payable are translated at year-end rates of exchange. For the main currencies in the Group, the following exchange rates have been used for one euro:

Currency Average exchange rate Year-end exchange rate ISO code 2005 2006 2005 2006 British pounds GBP 0.68 0.68 0.6853 0.6715 Swiss francs CHF 1.55 1.57 1.5551 1.6069 Japanese yen JPY 136.84 146.04 138.9000 156.9300 US dollars USD 1.24 1.25 1.1797 1.3170

Accounting estimates and assumptions The preparation of the consolidated financial statements is based on a number of accounting estimates and assumptions. These have an impact on the reported amounts of assets, liabilities and contingent liabilities at the balance sheet date and the disclosure of income and expenses for the fiscal year. The actual amounts may differ from these estimates. The accounting estimates and their underlying assumptions are continually reviewed. The effect of a change in an accounting estimate is included in the period of the change if the change affects the period only, or in the period of the change and future periods, if the change affects both. The judgements of the Management Board regarding the application of those IFRS which have a significant impact on the consolidated financial statements are presented in the explanatory notes on taxes on income (Note 9), intangible assets (Note 11) and pensions and similar obligations (Note 26).

Accounting standards not applied prior to their effective date The following standards, interpretations and revisions to existing standards of relevance to Henkel have not been applied by Henkel prior to their effective date: IFRIC 8 “Scope of IFRS 2”, amendments to IAS 1 “Presentation of Financial Statements re. Capital Disclosures”, IFRS 7 “Financial Instruments: Disclosures”, IFRIC 9 “Reassessment of Embedded Derivatives”, IFRIC 10 “Interim Reporting and Impairment”, IFRS 8 “Operating Segments”, and IFRIC 11 “IFRS 2 – Group Treasury Share Transactions”. We do not anticipate any significant impact on the presentation of the financial statements from the future application of IFRIC 8, IFRIC 9, IFRIC 10, and IFRIC 11. We expect additional disclosures to be required in the Notes when we apply the amended IAS 1, IFRS 7, and IFRS 8.

Adjustment to the 2005 statement of income Current restructuring costs from 2005 have been allocated proportionately to the appropriate individual functions in the statement of income (16 million euros to cost of sales, 2 million euros to marketing, selling and distribution costs and 6 million euros to administrative expenses).

78 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

Notes to the Consolidated Statement of Income

(0) Effect of significant acquisitions The brands acquired from Gillette achieved sales in 2006 of 129 million euros. On March 31, 2006, we consolidated Alba Ltda. in Brazil for the first time. The purchase price was 36 million euros. Immediately after the acquisition, the company was merged with Henkel Ltda., Brazil. In the course of the acquisition, trademark rights of 8 million euros, property, plant and equipment of 4 million euros and current assets of 8 million euros were assumed by Henkel, as well as liabilities of 5 million euros. The goodwill arising on the acquisition was 21 million euros. On September 30, 2006, Jasminal S.A.R.L., Tunisia, was included in the consolidation. The purchase price was 12 million euros. In the course of the acquisition, property, plant and equipment of 1 million euros, current assets of 3 million euros and liabilities of 3 million euros were assumed by Henkel. The goodwill arising on the acquisition was 11 million euros.

(1) Sales Sales comprise sales of goods and services less sales deductions. Sales are recognized once the goods have been delivered or the service has been performed. In the case of goods, this coincides with the physical delivery and transfer of risk. It must also be probable that the economic benefits associated with the transaction will flow to the company and the costs incurred in respect of the transaction must be able to be measured reliably. Services are generally provided in conjunction with the sale of goods and recorded once the service has been performed. No sale is recognized if there are significant risks relating to the receipt of the consideration or it is likely that the goods will be returned. Interest income is recognized on a time proportion basis that takes into account the effective yield on the asset and the interest rate in force. Dividend income from investments is recognized when the shareholder’s right to receive payment is established. An analysis of sales by business sector and geographical region is shown in the segment information on pages 74 and 75.

(2) Cost of sales Cost of sales comprises the cost of products and services sold and the purchase cost of merchandise sold. It consists of the directly attributable cost of materials and primary production cost, as well as indirect production overheads including the appropriate amount of wear and tear on non-current assets.

(3) Marketing, selling and distribution costs In addition to marketing organization and distribution costs, this item comprises mainly advertising, sales promotion and market research costs. Also included here are the costs of technical advisory services for customers and amounts written off accounts receivable of 23 million euros in 2006 (2005: 22 million euros).

(4) Research and development costs Research costs may not be recognized as an asset. Development costs are recognized as an asset if all the criteria for recognition are met, the research phase can be clearly distinguished from the development phase and the expenditure can be attributed to distinct individual project phases. Currently, the criteria set out in IAS 38 for recognizing development

costs are not all being met, due to a high level of interdependence within the development projects and the uncertainty Financial Statements Consolidated as to which products will eventually be marketable.

(5) Administrative expenses Administrative expenses include personnel and non-personnel costs of Group management and costs relating to the Human Resources, Purchasing, Accounts and IT departments.

Henkel Annual Report 2006 79 Notes to the Consolidated Financial Statements

(6) Other operating income

Other operating income in million euros 2005 2006 Gains on disposal of non-current assets 944 Profit on sale of businesses –57 Income from assignment of accounts receivable – 43 Income from release of provisions 31 58 Income from release of valuation allowances for doubtful debts 4 4 Write-ups of non-current assets 71 Foreign exchange gains on operating activities 37 32 Other operating revenue 95 59 Total 183 298

The income from the assignment of accounts receivable relates to the assignment by Henkel KGaA to Henkel Trust e.V. of a non-current receivable arising from claims pertaining to a hereditary building lease. We were able to achieve a profit on the sale of the insulating glass sealant business and the rubber-to-metal bonding chemicals business of 41 million euros and on the sale of the Dial food business of 16 million euros. These profits were invested to improve our other businesses. Other operating revenue includes income not related to the period under review, insurance compensation amounting to 3 million euros (2005: 3 million euros) and refunds of 2 million euros (2005: 2 million euros).

(7) Other operating charges

Other operating charges in million euros 2005 2006 Write-downs on miscellaneous assets 62 Foreign exchange losses on operating activities 31 35 Losses on disposal of non-current assets 37 Other operating expenses 38 46 Total 78 90

(8) Financial items

Financial items in million euros 2005 2006 Income from associated companies 72 83 Net result from other investments 18 –29 Net interest –210 –176 Total –120 –122

Included in financial assets in the 2005 consolidated financial statements was our investment in the Japanese company Lion Corporation, which was shown at its fair value of 78 million euros. The investment was sold on November 30, 2006. Due to a fall in the share price, we recognized a loss on remeasurement to fair value of 26 million euros in the statement of income.

80 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

Net result from other investments in million euros 2005 2006 Income from other investments 12 Income from profit and loss transfer agreements 1 – Income from the remeasurement of financial assets at fair value 22 – Gains on disposal of financial assets and marketable securities – 3 Write-downs on shares in affiliated and other companies and on marketable securities –4 –4 Losses arising from the remeasurement of financial assets to fair value – –30 Losses on disposal of financial assets –2 – Total 18 –29

Net interest in million euros 2005 2006 Income from long-term loans 71 Interest and similar income from third parties 43 55 Other financial income 20 15 Total interest income 70 71 Interest charges payable to third parties –142 –213 Other financial charges –44 –24 Interest expense for pension provisions less expected income from plan assets1) –94 –10 Total interest expense –280 –247 Total –210 –176

1) interest expense of 154 million euros and interest income of 144 million euros (2005: interest expense of 153 million euros and interest income of 59 million euros)

Included in other financial income are gains of 4 million euros (2005: 6 million euros) on the remeasurement to fair value of marketable securities, while other financial charges include losses on the remeasurement to fair value of marketable securities of 8 million euros (2005: 10 million euros).

(9) Taxes on income

Earnings before taxes on income and analysis of taxes in million euros 2005 2006 Earnings before tax 1,042 1,176 Current taxes 259 232 Deferred taxes 13 73 Taxes on income 272 305

Principal components of tax expense and income in million euros Financial Statements Consolidated 2005 2006 Current tax expense/income in the reporting year 261 262 Current tax adjustments for prior years –2 –30 Deferred tax expense/income from temporary differences 30 34 Deferred tax expense/income from changes in tax rates 2 –4 Increase/decrease in valuation allowances on deferred tax assets 16 –7

Henkel Annual Report 2006 81 Notes to the Consolidated Financial Statements

Allocation of deferred taxes in million euros Deferred tax assets Deferred tax liabilities Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2006 Intangible assets 139 71 523 456 Property, plant and equipment 57 28 105 96 Financial assets 35 63 35 28 Inventories 30 30 7 11 Other receivables and miscellaneous assets 78 74 35 30 Special tax-allowable items 6 8 110 99 Provisions 475 432 76 83 Liabilities 47 64 9 13 Tax credits 12 1 – – Loss carry-forwards 66 36 – – 945 807 900 816 Amounts netted –427 –389 –427 –389 Valuation allowances –62 –55 – – Balance sheet figures 456 363 473 427

Deferred tax assets and liabilities are accounted for with respect to temporary differences between the balance sheet valuation of an asset or liability and its tax base, and with respect to tax loss carry-forwards and consolidation procedures affecting earnings. Amounts netted represent tax assets and liabilities relating to the same tax authority. The deferred tax balances recognized by German and foreign companies with respect to temporary differences on provisions relate mainly to pensions and similar obligations. German companies have recognized deferred tax balances in respect of special tax-allowable items relating to property, plant and equipment and to reinvestment reserves. Whether deferred tax assets can be recognized depends on the probability that the deferred tax assets can actually be realized in the future. The level of probability must be more than 50 percent and must be supported by appropriate business plans. From 2004, German tax loss carry-forwards can be fully offset up to a maximum amount of 1 million euros, and thereafter up to a limit of 60 percent (minimum taxation). Included under the heading “Loss carry-forwards” are deferred tax assets of 5 million euros in respect of loss carry-forwards from 2004 in Germany, which are expected to be utilized by the end of 2007. The valuation allowances on deferred tax assets of 55 million euros (2005: 62 million euros) are in respect of temporary differences between the balance sheet valuation of an asset or liability and its tax base, and also tax loss carry-forwards, and are based on a reassessment of the likelihood that they will be utilized in the future. Deferred taxes have not been recognized with respect to tax loss carry-forwards of 355 million euros (2005: 513 million euros), as it is not sufficiently probable that taxable profit will be available against which they may be utilized. Deferred taxes of 1 million euros have been recognized with respect to tax credits.

Expiry dates of unused tax loss carry-forwards and tax credits Unused tax losses Tax credits Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2006 Must be utilized within: 1 year 73 27 – – 2 years 54 20 – – 3 years 38 22 – – more than 3 years 285 233 – – Carry forward without restriction 318 172 16 3 Total 768 474 16 3

82 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

This table includes loss carry-forwards arising from the disposal of assets of 26 million euros (2005: 35 million euros) which may be carried forward without restriction. In many countries, different tax rates apply to losses on the disposal of assets and to operating profits, and in some cases losses on the disposal of assets may only be offset against profits on the disposal of assets. Deferred taxes have not been recognized with respect to unused loss carry-forwards arising from the disposal of assets. Deferred tax liabilities have not been recognized on the retained profits of foreign subsidiaries. The retained profits are available to the subsidiaries for further investment. The individual company reconciliations – prepared on the basis of the tax rates applicable in each country and taking into account consolidation procedures – have been summarized in the reconciliation below. The estimated tax charge, based on the tax rate applicable to Henkel KGaA of 40 percent, is reconciled to the tax charge disclosed.

Calculation of the tax charge disclosed in million euros 2005 2006 Earnings before taxes on income 1,042 1,176 Tax rate (including municipal trade tax) on income of Henkel KGaA 40.0 % 40.0 % Estimated tax charge 417 470 Tax reductions due to differences between local tax rates and the hypothetical tax rate –68 –139 Tax reductions for prior years –2 –30 Tax increases due to losses in respect of which deferred taxes have not been recognized 13 22 Effects of different tax rates on net result from investments (at-equity investments) –27 –30 Tax reductions due to tax-free income and other items –107 –47 Tax increases due to non-deductible expenses and other items 46 59 comprising Non-deductible expenses 27 38 Municipal trade tax additions 817 Non-deductible withholding tax 11 4 Tax charge disclosed 272 305 Tax rate 26.10 % 25.94 %

German corporation tax legislation stipulates a statutory rate of 25.0 percent plus the solidarity surcharge of 5.5 percent. After taking into account municipal trade tax, this gives an expected tax rate in both 2005 and 2006 of 40.0 percent. The deferred tax assets charged to equity have decreased by 5 million euros (2005: increase by 107 million euros). The deferred tax assets relate to actuarial gains and losses on pension obligations and financial instruments.

(10) Minority interests The amount shown here represents the share of profits and losses attributable to other shareholders. The share of profits amounted to 26 million euros (2005: 19 million euros) and that of losses to 10 million euros (2005: 6 million euros). Consolidated Financial Statements Consolidated

Henkel Annual Report 2006 83 Notes to the Consolidated Financial Statements

Notes to the Consolidated Balance Sheet The accounting policies for balance sheet items are described in the relevant Note.

Effect of significant acquisitions:

Effect on balance sheet headings of significant acquisitions on first-time consolidation in million euros Right Guard Alba Jasminal Other Total Intangible assets/Property, plant and equipment 315 33 12 25 385 Current assets – 8 4 15 27 Provisions/Liabilities – 5 3 3 11

Non-current assets All non-current assets with finite lives are amortized or depreciated using the straight-line method on the basis of estimated useful lives standardized throughout the Group, with impairment losses being recognized when required. The following standard useful lives continue to be used as the basis for calculating amortization and depreciation:

Useful life in years

Intangible assets with finite lives 3 to 20 Residential buildings 50 Office buildings 40 Research and factory buildings, workshops, stores and staff buildings 25 to 33 Production facilities 10 to 25 Machinery 7 to 10 Office equipment 10 Vehicles 5 to 20 Factory and research equipment 2 to 5

(11) Intangible assets

Cost in million euros Trademark rights and other rights Assets with Assets with indefinite finite useful useful lives lives Goodwill Total At January 1, 2005 1,016 607 3,284 4,907 Changes in the Group/Acquisitions 11 269 284 564 Additions – 43 – 43 Disposals1) –44 –13 –25 –82 Reclassifications – 29 –3 26 Translation differences 114 76 441 631 At December 31, 2005/January 1, 2006 1,097 1,011 3,981 6,089 Changes in the Group/Acquisitions 180 6 166 352 Additions 7 40 – 47 Disposals1) – –18 – –18 Reclassifications – 5–5 Translation differences –114 –51 –365 –530 At December 31, 2006 1,170 993 3,782 5,945 1) of which assets held for sale 2006 – – – – 1) of which assets held for sale 2005 –44 –3 –25 –72

84 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

Accumulated amortization in million euros Trademark rights and other rights Assets with Assets with indefinite finite useful lives useful lives Goodwill Total At January 1, 2005 – 353 – 353 Changes in the Group/Acquisitions – – – – Write-ups – – – – Scheduled amortization – 49 – 49 Impairment losses 4 5 – 9 Disposals – –10 – –10 Reclassifications – –2 – –2 Translation differences – 30 – 30 At December 31, 2005/January 1, 2006 4 425 – 429 Changes in the Group/Acquisitions – –1 – –1 Write-ups – – – – Scheduled amortization – 53 – 53 Impairment losses – 3 – 3 Disposals – –16 – –16 Reclassifications – – – – Translation differences – –10 – –10 At December 31, 2006 4 454 – 458

Net book value in million euros Trademark rights and other rights Assets with Assets with indefinite finite useful lives useful lives Goodwill Total At December 31, 2006 1,166 539 3,782 5,487 At December 31, 2005 1,093 586 3,981 5,660

Intangible assets acquired for valuable consideration are stated initially at acquisition cost, while internally generated software is stated at production cost. Thereafter, goodwill and trademark rights and other rights with indefinite useful lives are subject to an impairment test at least once a year (impairment-only approach). In the course of our annual impairment test, we reviewed the carrying values of goodwill and trademark rights and other rights with indefinite useful lives. The following table shows the cash-generating units together with the associated goodwill and trademark rights and other rights with indefinite useful lives at book value at the balance sheet date: Consolidated Financial Statements Consolidated

Henkel Annual Report 2006 85 Notes to the Consolidated Financial Statements

Book value in million euros Dec. 31, 2005 Dec. 31, 2006 Trademark Trademark rights and rights and other rights other rights with indefinite with indefinite Cash-generating units useful lives Goodwill useful lives Goodwill Detergents 360 761 335 710 Household cleaners 324 927 254 822 Total Laundry & Home Care 684 1,688 589 1,532 Retail products 347 1,021 512 1,069 Hair salon products 14 37 14 33 Total Cosmetics/Toiletries 361 1,058 526 1,102 Adhesives and sealants for construction, craftsmen and DIY 44 255 47 258 Adhesives and adhesive tapes for home, school and office – 161 – 155 Total Consumer and Craftsmen Adhesives 44 416 47 413 Transport and electronics 4 365 4 303 Industrial adhesives – 454 – 432 Total Henkel Technologies 4 819 4 735

The assessment for goodwill impairment, comparing the fair value of the goodwill less costs to sell with the carrying amount, is based on future estimated cash flows, which are obtained from corporate budgets with a three-year financial forecasting horizon. For the period after that, an average growth rate of 1 percent in the cash flows was assumed for the purpose of the impairment test. The euro to US dollar exchange rate applied was 1.25. The cash flows in all cash- generating units were discounted at different rates for the cost of capital in each business sector from 6.6 to 7.9 percent after tax, taking into account specific tax effects. No goodwill impairment losses were recognized as a result of the impairment test. In the Laundry & Home Care business sector, we have assumed an average increase in sales during the three-year budget period of 3 percent per annum with a constant share of the world market. Sales growth in the Cosmetics/Toiletries business sector over the three-year forecasting horizon is budgeted at around 3 percent per annum. With the worldwide cosmetics market expected to grow at an annual rate of 2 percent, this would mean a slight increase in market share. In the Consumer and Craftsmen Adhesives business sector, average sales growth over the three-year forecasting horizon is budgeted at 4 to 5 percent per annum. General market growth is expected to be at around 3 percent per annum, so we forecast an increase in market share. Average sales growth of 6 percent per annum is budgeted in the Henkel Technologies business sector, while market growth is expected to be around 3 percent per annum. We expect to expand our market share still further, especially in the growth regions in Asia/Pacific and Eastern Europe. In all the business sectors, we have assumed that future increases in the price of raw materials will be more moderate than in previous years and will be largely offset by economy measures in Purchasing. Together with further cost-cutting exercises, this will result in stable gross margins in the Cosmetics/Toiletries business sector. In the Laundry & Home Care, Consumer and Craftsmen Adhesives and Henkel Technologies business sectors, we are expecting gross margins to increase. Isolated negative budget variances would not necessarily lead to impairment losses. The trademark rights and other rights with an indefinite useful life are established in their markets and will continue to be promoted in the future. In the impairment tests in 2006 for trademark rights and other rights with an indefinite useful life of 1,166 million euros, cash-generating units were identified and their recoverable amounts determined. No impairment losses were recognized as a result of the impairment test.

86 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

(12) Property, plant and equipment

Cost in million euros Payments on account Land, land Factory and and assets rights and Plant and office in course of buildings machinery equipment construction Total At Jan. 1, 2005 1,555 2,394 790 116 4,855 Changes in the Group/Acquisitions 38 56 4 2 100 Additions 49 131 89 124 393 Disposals1) –69 –100 –70 –5 –244 Reclassifications 25 41 20 –112 –26 Translation differences 19 147 37 4 207 At Dec. 31, 2005/Jan. 1, 2006 1,617 2,669 870 129 5,285 Changes in the Group/Acquisitions 7 15 –1 – 21 Additions 68 123 83 157 431 Disposals1) –48 –140 –64 –6 –258 Reclassifications 13 54 22 –94 –5 Translation differences –45 –70 –26 –6 –147 At Dec. 31, 2006 1,612 2,651 884 180 5,327 1) of which assets held for sale 2006 –7 –3 – – –10 1) of which assets held for sale 2005 –38 –18 –3 –1 –60

Accumulated depreciation in million euros Payments on account Land, land Factory and and assets rights and Plant and office in course of buildings machinery equipment construction Total At Jan. 1, 2005 759 1,681 606 1 3,047 Changes in the Group/Acquisitions – 3 – – 3 Write-ups –5 –2 – – –7 Scheduled depreciation 46 178 55 – 279 Impairment losses 4 – – – 4 Disposals1) –35 –72 –63 –1 –171 Reclassifications –1 –13 16 – 2 Translation differences –7 80 10 – 83 At Dec. 31, 2005/Jan. 1, 2006 761 1,855 624 – 3,240 Changes in the Group/Acquisitions – 3 – – 3 Write-ups – –1 – – –1 Scheduled depreciation 45 149 88 – 282 Impairment losses 4 7 2 – 13 Disposals1) –36 –126 –58 – –220 Reclassifications 1 7 –8 – – Translation differences –14 –27 –27 – –68 Consolidated Financial Statements Consolidated At Dec. 31, 2006 761 1,867 621 – 3,249 1) of which assets held for sale 2006 –3 –2 – – –5 1) of which assets held for sale 2005 –18 –1 – – –19

Henkel Annual Report 2006 87 Notes to the Consolidated Financial Statements

Net book value in million euros Payments on account Land, land Factory and and assets rights and Plant and office in course of buildings machinery equipment construction Total At December 31, 2006 851 784 263 180 2,078 At December 31, 2005 856 814 246 129 2,045

Additions are stated at purchase or manufacturing cost. The latter includes direct costs and appropriate proportions of overheads; interest charges on borrowings are not included. Cost figures are shown net of investment grants and allowances. There were liabilities secured by mortgages at December 31, 2006 of 24 million euros (2005: 33 million euros). The periods over which the assets are depreciated are based on their estimated useful lives as set out on page 84. Scheduled depreciation and impairment losses recognized are disclosed in the consolidated statement of income according to the functions for which the assets are used.

(13) Financial assets Shares in affiliated companies and other investments disclosed in financial assets are measured initially at cost and subsequently at their fair values. Other investments for which the fair value cannot be reliably determined are measured subsequently at amortized cost. Shares in affiliated companies are measured at amortized cost. The shares in the associated company Ecolab Inc. are accounted for using the equity method at the appropriate proportion of its net assets (see Notes 8 and 50, pages 80 and 113). The percentage holding is calculated on the basis of the shares outstanding. The updated net asset figure is translated at the mid rate of exchange on the balance sheet date. The decrease in the carrying value of Ecolab Inc. is due to a share repurchase during 2006 and to the offsetting of the actuarial gains and losses arising on the measurement of the pension provisions. These two factors had a significant impact on the equity of Ecolab Inc. and therefore also on the equity valuation of our investment. The shares in the other investment in Lion Corporation were sold in the course of 2006. As a result in the fall in the stock market price of the shares, we recognized a loss on remeasurement to fair value of 26 million euros.

Cost in million euros Shares in Affiliated associated Other Long-term companies companies investments loans Total At Jan. 1, 2005 348 463 116 134 1,061 Changes in the Group/Acquisitions –316 – – – –316 Additions – 54 24 – 78 Disposals –1 – –11 –127 –139 Reclassifications – – – – – Translation differences 2 13 – – 15 At Dec. 31, 2005/Jan. 1, 2006 33 530 129 7 699 Changes in the Group/Acquisitions –18 – – – –18 Additions 33 59 1 – 93 Disposals – –83 –92 –4 –179 Reclassifications – – – – – Translation differences –3 –10 – – –13 At Dec. 31, 2006 45 496 38 3 582

88 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

Accumulated write-downs in million euros Shares in Affiliated associated Other Long-term companies companies investments loans Total At Jan. 1, 2005 3 – 19 1 23 Changes in the Group/Acquisitions – – – – – Write-ups – – – – – Write-downs – – 4 – 4 Disposals – – –10 – –10 Reclassifications – – – – – Translation differences 1 – – – 1 At Dec. 31, 2005/Jan. 1, 2006 4 – 13 1 18 Changes in the Group/Acquisitions –2 – – – –2 Write-ups – – – –1 –1 Write-downs – – 4 – 4 Disposals – – –2 – –2 Reclassifications – – – – – Translation differences – – – – – At Dec. 31, 2006 2 – 15 – 17

Net book value in million euros Shares in Affiliated associated Other Long-term companies companies investments loans Total At December 31, 2006 43 496 23 3 565 At December 31, 2005 29 530 116 6 681

(14) Other non-current assets These include non-current receivables and miscellaneous assets, which are stated at face value or at their fair values. Income tax assets amounted to 5 million euros (2005: 5 million euros). As soon as risks are identified in other non-current assets, valuation allowances are set up.

(15) Deferred tax Deferred taxes result from the following factors: >> timing differences between the balance sheet valuation of an asset or liability and its tax base >> tax losses carried forward which are expected to be utilized >> consolidation procedures at Group level

The allocation of deferred tax assets to the various balance sheet headings is shown in Note 9 (Taxes on income, page 81 ff.). Consolidated Financial Statements Consolidated (16) Inventories Inventories are stated at purchase or manufacturing cost. Inventories are measured using the FIFO and the weighted average method as appropriate. Manufacturing cost includes – in addition to direct costs – appropriate proportions of necessary overheads (e.g. the goods inward department, raw materials store, filling and other costs prior to the finished products store), as well as production-related administrative expenses and pension costs for employees engaged in the production process, and

Henkel Annual Report 2006 89 Notes to the Consolidated Financial Statements

production-related depreciation charges. Interest charges incurred during the period of manufacture are however not included. Inventories are written down to their net realizable value if, on the basis of lower quoted or market prices, this is lower than cost at the balance sheet date. The write-down, based on the gross value, was 54 million euros (2005: 32 million euros).

Analysis of inventories in million euros Dec. 31, 2005 Dec. 31, 2006 Raw materials and supplies 368 386 Work in process 28 67 Finished products and merchandise 830 859 Payments on account for merchandise 613 Total 1,232 1,325

(17) Trade accounts receivable Trade accounts receivable are due within one year. Specific risks are covered by appropriate valuation allowances. A total of 23 million euros (2005: 22 million euros) has been provided in the form of valuation allowances.

(18) Other current receivables and miscellaneous assets

Other current receivables and miscellaneous assets in million euros Dec. 31, 2005 Dec. 31, 2006 Amounts receivable from non-consolidated affiliated companies 4 1 Amounts receivable from companies in which an investment is held 5 5 Derivatives with positive fair values 32 41 Miscellaneous assets 298 353 Deferred charges 39 36 Total 378 436

Other current receivables and miscellaneous assets are shown at face value or at their fair values. Any risks associated with them are covered by valuation allowances. Miscellaneous assets include the following: >> financial receivables from third parties: 23 million euros (2005: 53 million euros) >> amounts due from employees: 13 million euros (2005: 13 million euros) >> amounts due from suppliers: 24 million euros (2005: 27 million euros) >> insurance claims: 2 million euros (2005: 2 million euros) >> payments made on account: 20 million euros (2005: 13 million euros) >> other tax receivables: 122 million euros (2005: 74 million euros)

(19) Liquid funds and marketable securities

Liquid funds and marketable securities in million euros Dec. 31, 2005 Dec. 31, 2006 Liquid funds 223 181 Marketable securities 989 748 Total 1,212 929

90 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

Marketable securities are stated at their fair values at the balance sheet date. They comprise mainly fixed-interest bonds. Price movements are recognized in the statement of income under financial items.

(20) Assets held for sale The remeasurement of the assets held for sale at the lower of their carrying amount and fair value less costs to sell did not lead to the recognition of any impairment losses. The amounts included under the heading “Assets held for sale” in 2005 related principally to assets which were expected to be disposed of under an asset deal when the foods business (Armour) of the Dial Corporation, USA, was sold. The foods business is not a significant line or core business within the Henkel Group. The business was sold in March 2006.

(21) Subscribed capital

Subscribed capital in million euros Dec. 31, 2005 Dec. 31, 2006 Ordinary bearer shares 222 222 Non-voting preferred bearer shares 152 152 Capital stock 374 374 Comprising 86,598,625 ordinary shares and 59,387,625 non-voting preferred shares

At the Annual General Meeting of Henkel KGaA held on April 30, 2001, the personally liable managing partners were authorized – with the approval of the Shareholders’ Committee and of the Supervisory Board – to increase the capital of the Company in one or more installments at any time up to May 1, 2006, up to a total of 25.6 million euros by issuing new non-voting preferred shares to be paid up in cash (authorized capital). The personally liable managing partners were authorized – with the approval of the Shareholders’ Committee and of the Supervisory Board – to exclude the statutory pre-emptive rights of existing shareholders. Pre-emptive rights may only be excluded, however, for fractional entitlements or on condition that the issue price for the new shares is not significantly less than the quoted market price of shares of the same category at the time the issue price is finally fixed. This authorization was renewed for the period until April 9, 2011 at the Annual General Meeting on April 10, 2006, and at the same time the authorization granted on April 30, 2001 was withdrawn. At the Annual General Meeting of Henkel KGaA on April 18, 2005, the personally liable managing partners were authorized to purchase ordinary or preferred shares in the Company not exceeding 10 percent of the capital stock, i.e. up to 14,598,625 shares, at any time up to October 17, 2006. This authorization was renewed for the period until October 9, 2007 at the Annual General Meeting on April 10, 2006, and at the same time the authorization granted in the previous year was withdrawn. The personally liable managing partners were authorized – with the approval of the Shareholders’ Committee and of the Supervisory Board – to dispose of treasury shares acquired, without first offering them to existing shareholders, by: >> offering and transferring them to members of the Management Board and certain executive management personnel of Henkel KGaA and to members of the management boards and certain executive management personnel of certain affiliated companies in Germany and abroad under the terms of the Stock Incentive Plan of the Henkel Group, or >> selling them to third parties or transferring them in other ways for the purpose of acquiring businesses, parts of

businesses or investments in businesses or for forming business combinations, or Financial Statements Consolidated >> selling them for cash in a way other than on the stock market or via an offer addressed to all the shareholders, provided that the selling price of the shares is not significantly lower than the quoted market price at the time of the sale. In this case, the number of shares sold, together with the new shares issued out of authorized capital while excluding the pre-emptive rights of existing shareholders, must not exceed 10 percent of the existing capital stock when the shares are issued or sold

Henkel Annual Report 2006 91 Notes to the Consolidated Financial Statements

Insofar as members of the Management Board of the Company are among those eligible to participate in the Stock Incentive Plan, the Shareholders’ Committee is authorized – with the approval of the Supervisory Board – to offer and transfer the shares. The personally liable managing partners were also authorized – with the approval of the Shareholders’ Committee and of the Supervisory Board – to cancel the treasury stock without any further resolution in General Meeting being required. Treasury stock held by the Company at December 31, 2006 amounted to 1,819,498 preferred shares. This represents 1.25 percent of the capital stock and a proportional nominal value of 4.66 million euros. 992,680 of these shares were originally bought back in 2000, 808,120 in 2001 and 694,900 in 2002 (2,495,700 shares in total). In 2004, options were exercised under the Stock Incentive Plan for the first time. Since 2004, the exercise of options has led to a reduction of 676,202 in treasury stock held, with a proportional nominal value of 1,731,000 euros (0.46 percent of the capital stock). In 2006, the exercise of options led to a reduction of 555,082 in treasury stock held. The proportional nominal value of the capital stock amounted to 1,421,000 euros (0.38 percent). The selling prices were based on the stock market prices prevailing at the time of disposal, and the gain on disposal was 47 million euros, which was recognized directly in equity.

(22) Capital reserve The capital reserve comprises the amounts received in previous years in excess of the nominal value of preferred shares and convertible warrant bonds issued by Henkel KGaA.

(23) Revenue reserves The revenue reserves include the following: >> amounts allocated in the financial statements of Henkel KGaA in previous years >> amounts allocated from consolidated net earnings less minority interests >> buy-back of treasury stock by Henkel KGaA at cost and the gain on their disposal >> the recognition in equity of actuarial gains and losses

Revenue reserves also include changes in the equity valuation of our investment in Ecolab Inc. reflected directly in equity. These result mainly from recognizing actuarial gains and losses in equity and from share repurchase schemes in Ecolab Inc.

(24) Gains and losses recognized in equity The items under this heading represent the differences on translation of the financial statements of foreign subsidiary companies and the effects of the revaluation of financial instruments recognized in equity. Mainly as a result of the decrease in the value of the US dollar against the euro, the negative translation difference at December 31, 2006 was up by 486 million euros compared with December 31, 2005 (2005: negative amount reduced by 602 million euros).

(25) Minority interests The minority interests comprise the shares of third parties in the equity of a number of companies included in the consolidation.

(26) Pensions and similar obligations Employees of companies included in the consolidation have entitlements under company pension plans which are either defined-contribution or defined-benefit plans. These take different forms depending on the legal, financial and tax regime in each country. The level of benefits provided is based, as a rule, on the length of service and earnings of the person entitled.

92 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

The defined-contribution plans are structured in such a way that the Company pays contributions to public or private sector institutions on the basis of statutory or contractual terms or on a voluntary basis and has no further obligations regarding the payment of benefits to the employee. In defined-benefit plans, the liability for pensions and other post-employment benefits is calculated at the present value of the future obligations (the projected unit credit method). This actuarial method of calculation takes future trends in wages, salaries and retirement benefits into account. Effective January 1, 2004, most of the defined-benefit plans in Germany were harmonized on the basis of a unit-based plan (“Pensions 2004”). To provide protection under civil law of the pension entitlements of future and current pensioners against insolvency, the proceeds of the bond issued in 2005 and certain other assets were allocated to Henkel Trust e.V. The trustee invests the cash with which it has been entrusted in the capital market in accordance with investment policies laid down in the trust agreement.

Trends in wages, salaries and retirement benefits in percent Germany USA Rest of world1) 2005 2006 2005 2006 2005 2006 Discount factor 4.3 4.3 5.75 5.8 2.0 – 6.0 2.0 – 6.0 Income trend 3.0 3.0 4.0 4.0 1.7 – 4.0 1.7 – 4.0 Retirement benefit trend 1.5 1.5 – – 0 – 3.0 0 – 3.0 Expected return on plan assets 4.8 6.3 7.0 7.0 1.7 – 7.0 1.7 – 7.0 Expected increases in costs for medical benefits – – 5.0 – 10.5 5.0 – 10.0 5.25 – 10.5 5.0 – 10.0

1) For the eurozone, a discount factor of 4.3 percent was used (2005: 4.3 percent).

The expected return on total plan assets was derived from the weighted expected long-term return on the various categories of assets.

Present value of pensions and similar obligations at December 31, 2005 in million euros Rest of Germany USA world Total At January 1, 2005 1,792 693 455 2,940 Changes in the Group/Translation differences 1 107 10 118 Actuarial gains/losses 187 16 49 252 Current service cost 51 24 24 99 Amortization of past service cost – – 2 2 Gains/losses arising from the termination and curtailment of plans 3 – – 3 Interest expense 85 45 23 153 Allocated 139 69 49 257 Employees’ contributions to pension funds – – 1 1 Retirement benefits paid out of plan assets –8 –30 –11 –49 Employer’s payments for pensions and similar obligations –105 –20 –13 –138

Utilized –113 –50 –23 –186 Financial Statements Consolidated Released – –21 –6 –27 At December 31, 2005 2,006 814 534 3,354

Henkel Annual Report 2006 93 Notes to the Consolidated Financial Statements

Fair value of plan assets at December 31, 2005 in million euros Rest of Germany USA world Total At January 1, 2005 34 416 273 723 Changes in the Group/Translation differences 1 67 6 74 Employer’s contributions to pension funds 1,421 17 19 1,457 Employees’ contributions to pension funds – – 1 1 Retirement benefits paid out of plan assets –8 –30 –11 –49 Expected return on plan assets 9 32 18 59 Actuarial gains (+)/losses (–) – – 29 29 At December 31, 2005 1,457 502 335 2,294 Actual return on plan assets 9 32 47 88

Pensions and similar obligations in the balance sheet at December 31, 2005 in million euros Rest of Germany USA world Total At January 1, 2005 1,758 277 183 2,218 Changes in the Group/Translation differences – 40 4 44 Actuarial gains/losses 187 16 20 223 Allocated 130 37 31 198 Utilized –1,526 –37 –32 –1,595 Released – –21 –6 –27 At December 31, 2005 549 312 200 1,061 Analysis of provisions for pensions and similar obligations: Present value of unfunded obligations 165 254 100 519 Present value of funded obligations 1,841 560 434 2,835 Fair value of plan assets –1,457 –502 –335 –2,294 Unrecognized past service cost – – 1 1 Total 549 312 200 1,061

Net pension cost in 2005 in million euros Rest of Germany USA world Total Current service cost 51 24 24 99 Amortization of past service cost – – 2 2 Gains/losses arising from the termination and curtailment of plans 3 – – 3 Interest expense 85 45 23 153 Expected return on plan assets –9 –32 –18 –59 Allocation to provision for pensions and similar obligations 130 37 31 198

94 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

Present value of pensions and similar obligations at December 31, 2006 in million euros Rest of Germany USA world Total At January 1, 2006 2,006 814 534 3,354 Changes in the Group/Translation differences –1 –85 –12 –98 Actuarial gains/losses 9 5 7 21 Current service cost 86 20 27 133 Amortization of past service cost – – 6 6 Gains/losses arising from the termination and curtailment of plans – 1 –1 – Interest expense 86 43 25 154 Allocated 172 64 57 293 Employees’ contributions to pension funds 2 – 1 3 Retirement benefits paid out of plan assets –13 –26 –14 –53 Employer’s payments for pensions and similar obligations –103 –20 –14 –137 Utilized –114 –46 –27 –187 Released – –30 –1 –31 At December 31, 2006 2,072 722 558 3,352

Fair value of plan assets at December 31, 2006 in million euros Rest of Germany USA world Total At January 1, 2006 1,457 502 335 2,294 Changes in the Group/Translation differences – –55 –10 –65 Employer’s contributions to pension funds 170 13 27 210 Employees’ contributions to pension funds 2 – 1 3 Retirement benefits paid out of plan assets –13 –26 –14 –53 Expected return on plan assets 90 33 21 144 Actuarial gains (+)/losses (–) –16 30 17 31 At December 31, 2006 1,690 497 377 2,564 Actual return on plan assets 74 63 38 175

Pensions and similar obligations in the balance sheet at December 31, 2006 in million euros Rest of Germany USA world Total At January 1, 2006 549 312 200 1,061 Changes in the Group/Translation differences –1 –30 –3 –34 Actuarial gains/losses 25 –25 –10 –10 Allocated 82 31 36 149 Utilized –273 –33 –41 –347 Released – –30 –1 –31 At December 31, 2006 382 225 181 788 Consolidated Financial Statements Consolidated Analysis of provisions for pensions and similar obligations: Present value of unfunded obligations 137 212 94 443 Present value of funded obligations 1,935 510 464 2,909 Fair value of plan assets –1,690 –497 –377 –2,564 Unrecognized past service cost – – – – Total 382 225 181 788

Henkel Annual Report 2006 95 Notes to the Consolidated Financial Statements

Net pension cost in 2006 in million euros Rest of Germany USA world Total Current service cost 86 20 27 133 Amortization of past service cost – – 6 6 Gains/losses arising from the termination and curtailment of plans – 1 –1 – Interest expense 86 43 25 154 Expected return on plan assets –90 –33 –21 –144 Allocation to provision for pensions and similar obligations 82 31 36 149

Actuarial gains and losses are recognized in the year in which they arise as part of the pension provision and included in the “Statement of recognized income and expense” in accordance with IAS 19.93B. As of December 31, 2006, accumulated actuarial gains and losses of 630 million euros had been offset against revenue reserves. Of the amounts allocated to the provision in 2006, 139 million euros (2005: 104 million euros) is included in operating profit (pension costs as part of payroll costs, page 104) and 10 million euros (2005: 94 million euros) in financial items (page 80). The expenses shown in operating profit and all the releases from provisions are allocated by function depending on the sphere of activity of the employee.

Analysis of plan assets in million euros December 31, 2005 December 31, 2006 Fair value in % Fair value in % Shares/Investment fund units 779 34.0 2,086 81.4 Bonds 650 28.3 295 11.5 Other assets 699 30.5 183 7.1 Cash 166 7.2 – – Total 2,294 100.0 2,564 100.0

At December 31, 2006, other assets include the present value of a non-current receivable of 43 million euros (2005: 0 million euros) relating to claims pertaining to a hereditary building lease assigned by Henkel KGaA to Henkel Trust e.V. Also shown here is a claim of 116 million euros (2005: 121 million euros) against Cognis for indemnification of pension obligations.

Additional information in million euros 2005 2006 Present value of obligations 3,354 3,352 Fair value of plan assets 2,294 2,564 Overfunding/underfunding of pension obligations –1,060 –788 Effect of experience adjustments on pension obligations –11 –1 Effect of experience adjustments on plan assets 29 31

96 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

(27) Other long-term provisions

Changes in 2005 in million euros Balance Special Balance Jan. 1, circum- Dec. 31, 2005 stances Utilized Released Allocated 2005 Tax provisions 221 –8 103 2 79 187 Sundry long-term provisions 224 –10 121 7 113 199 Advanced Restructuring 154 –111 – 2 – 41 Total 599 –129 224 11 192 427

Changes in 2006 in million euros Balance Special Balance Jan. 1, circum- Dec. 31, 2006 stances Utilized Released Allocated 2006 Tax provisions 187 –10 138 – 130 169 Sundry long-term provisions 199 –44 45 3 8 115 Advanced Restructuring 41 –31 – – – 10 Total 427 –85 183 3 138 294

The amounts recognized as other long-term provisions are the best estimates of the expenditure required to settle the present obligations at the balance sheet date. Provisions which include significant interest elements are discounted to the balance sheet date. Special circumstances include changes in the Group/acquisitions, movements in exchange rates and adjustments to reflect changes in maturity as time passes. The tax provisions comprise accrued tax liabilities and amounts set aside for the outcome of external tax audits and legal proceedings. The sundry long-term provisions pertain to identifiable obligations toward third parties, which are costed in full. The Advanced Restructuring provisions comprise amounts relating to measures which have not been completed by the 2006 year-end.

Analysis of sundry long-term provisions by function in million euros Dec. 31, 2005 Dec. 31, 2006 Sales 95 Personnel 36 37 Production and engineering 40 49 Administration 114 24 Total 199 115 Consolidated Financial Statements Consolidated

Henkel Annual Report 2006 97 Notes to the Consolidated Financial Statements

(28) Long-term borrowings Long-term borrowings comprise all long-term interest-bearing obligations outstanding at the balance sheet date. The maturities of these obligations at December 31, 2005 were:

Analysis in million euros Residual term more than between 1 Dec. 31, 2005 5 years and 5 years Total Bonds 2,332 – 2,332 (of which amounts secured) (40) Bank loans and overdrafts1) 81725 (of which amounts secured) (17) Other financial liabilities –4343 (of which amounts secured) (4) Total 2,340 60 2,400

1) obligations with variable rates of interest or interest rates pegged for less than one year

The bonds at December 31, 2005 included the following:

Bonds in million euros Issued by Type Nominal value Interest rate1) Interest fixed Henkel KGaA Bond 1,000 4.2500 until 20132) Interest rate swap (3-month Euribor +0.405 %) Receiver swap 1,000 2.8571 3 months Henkel KGaA Hybrid bond 1,300 5.3750 until 20153) Interest rate swap (3-month Euribor +1.80 %) Receiver swap 650 4.3020 3 months

1) interest rate on December 31, 2005 2) fixed-rate interest of bond coupon: 4.25 percent, converted using interest rate swaps into a floating interest rate, interest rate to be fixed next on March 10, 2006 (fair value hedge) 3) fixed-rate interest of bond coupon: 5.375 percent, 50 percent converted using interest rate swaps into a floating interest rate, interest rate to be fixed next on February 27, 2006 (fair value hedge)

Maturities of long-term obligations at December 31, 2006 were:

Analysis in million euros Residual term more than between 1 Dec. 31, 2006 5 years and 5 years Total Bonds 2,253 – 2,253 (of which amounts secured) (12) Bank loans and overdrafts1) 10 16 26 (of which amounts secured) (12) Other financial liabilities –4343 (of which amounts secured) (2) Total 2,263 59 2,322

1) obligations with floating rates of interest or interest rates pegged for less than one year

The bonds at December 31, 2006 included the following:

Bonds in million euros Issued by Type Nominal value Interest rate1) Interest fixed Henkel KGaA Bond 1,000 4.2500 until 20132) Interest rate swap (3-month Euribor +0.405 %) Receiver swap 1,000 4.0671 3 months Henkel KGaA Hybrid bond 1,300 5.3750 until 20153) Interest rate swap (3-month Euribor +1.80 %) Receiver swap 650 5.4182 3 months

1) interest rate on December 31, 2006 2) fixed-rate interest of bond coupon: 4.25 percent, converted using interest rate swaps into a floating interest rate, interest rate to be fixed next on March 12, 2007 (fair value hedge) 3) fixed-rate interest of bond coupon: 5.375 percent, 50 percent converted using interest rate swaps into a floating interest rate, interest rate to be fixed next on February 26, 2007 (fair value hedge)

98 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

The bond issued by Henkel KGaA for 1 billion euros in 2003 with a coupon of 4.25 percent matures in June 2013. The 1.3 billion euro subordinated hybrid bond issued by Henkel KGaA in November 2005 to finance a large part of the pension obligations in Germany matures in 99 years in 2104. Under the terms of the bond, the coupon for the first ten years is 5.375 percent. After that period, from November 25, 2015, it will be possible to redeem the bond. If it is not redeemed, the bond interest will be based on the 3-month Euribor interest rate plus a premium of 2.85 percent. The bond terms also stipulate that if there is a “cash flow event”, Henkel KGaA has the option or the obligation to defer the interest payments. A cash flow event is deemed to have occurred if the adjusted cash flow from operating activities is below a certain percentage of the net liabilities (20 percent for optional interest deferral, 15 percent for mandatory interest deferral); see § 3(4) of the bond terms and conditions for the definition. On the basis of the cash flow calculated at December 31, 2006, the percentage was +50.92 percent (2005: +40.81 percent).

(29) Other non-current liabilities Other non-current liabilities relate largely to amounts due to employees and to derivatives at fair values.

(30) Deferred tax The provisions for deferred tax relate to differences between the accounting base in the consolidated balance sheet and the tax base used by the individual companies included in the consolidation to calculate their taxable profits (page 81).

(31) Short-term provisions

Changes in 2005 in million euros At Special At Jan. 1, circum- Dec. 31, 2005 stances Utilized Released Allocated 2005 Tax provisions 85 7 70 3 95 114 Sundry short-term provisions 664 40 520 51 574 707 Strong for the Future/Extended Restructuring 19 – 19 – – – Advanced Restructuring 150 111 148 2 – 111 Total 918 158 757 56 669 932

Changes in 2006 in million euros At Special At Jan. 1, circum- Dec. 31, 2006 stances Utilized Released Allocated 2006 Tax provisions 114 44 107 35 96 112 Sundry short-term provisions 707 44 709 39 832 835 Advanced Restructuring 111 31 97 – – 45 Total 932 119 913 74 928 992

The amounts recognized as short-term provisions are the best estimates of the expenditure required to settle the present obligations at the balance sheet date. Consolidated Financial Statements Consolidated

Henkel Annual Report 2006 99 Notes to the Consolidated Financial Statements

Analysis by function in million euros Dec. 31, 2005 Dec. 31, 2006 Sales 257 268 Personnel 294 314 Production and engineering 44 17 Administration 112 236 Total 707 835

(32) Short-term borrowings

Short-term borrowings in million euros Dec. 31, 2005 Dec. 31, 2006 Total Total Bonds 31 31 Commercial papers1) 767 147 Loans from employee welfare funds of the Henkel Group 1 4 Bank loans and overdrafts 245 401 (of which amounts secured) (29) (33) Other financial liabilities 361 429 Total 1,405 1,012

1) from the US dollar Commercial Paper Program (total amount: 2 billion US dollars)

Other financial liabilities include interest-bearing loans from third parties and finance bills.

(33) Trade accounts payable Trade accounts payable include invoices received and accruals for invoices outstanding in respect of goods and services received.

(34) Other current liabilities

Other current liabilities in million euros Dec. 31, 2005 Dec. 31, 2006 Total Total Amounts due to non-consolidated affiliated companies 2 9 Amounts due to other companies in which investments are held 1 – Liabilities in respect of social security 32 22 Income tax liabilities 827 Other tax liabilities 70 97 Derivatives with negative fair values 106 12 Sundry current liabilities including deferred income 236 177 (of which amounts secured) (–) (–) Total 455 344

Sundry current liabilities include: >> amounts due to customers of 26 million euros (2005: 20 million euros) >> commission payable of 4 million euros (2005: 5 million euros) >> amounts due to employees of 40 million euros (2005: 81 million euros) >> advance payments received of 4 million euros (2005: 4 million euros) >> liabilities relating to employees’ deductions of 42 million euros (2005: 54 million euros)

100 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

(35) Contingent liabilities

Contingent liabilities in million euros Dec. 31, 2005 Dec. 31, 2006 Bills and notes discounted 4– Liabilities under guarantee and warranty agreements 20 17

(36) Other financial commitments Payment obligations under rent, leasehold and lease agreements are shown at the total amounts payable up to the earliest date when they can be terminated. The amounts shown are the nominal values. At December 31, 2006, they were due for payment as follows:

Rent, leasehold and lease commitments in million euros Dec. 31, 2005 Dec. 31, 2006 Due in the following year 25 36 Due within 1 to 5 years 102 94 Due after 5 years 618 Total 133 148

The order commitments for property, plant and equipment amounted to 68 million euros at the end of 2006 (2005: 36 million euros), the purchase commitments from toll manufacturing contracts amounted to 31 million euros (2005: 47 million euros). Payment commitments under the terms of agreements for capital increases and share purchases signed prior to December 31, 2006 amounted to 22 million euros (2005: 26 million euros).

(37) Derivatives and other financial instruments

Treasury guidelines and systems The Corporate Treasury department manages currency exposure and interest rates centrally for the Group and therefore all transactions with financial derivatives and other financial instruments. Trading, treasury control and settlement (front, middle and back offices) are separated both physically and in terms of organization. The parties to the contracts are German and international banks which Henkel monitors regularly, in accordance with Corporate Treasury guidelines, for creditworthiness and the quality of their quotations. Financial derivatives are used to manage currency exposure and interest rate risks in connection with operating activities and the resultant financing requirements, again in accordance with the Treasury guidelines. Financial derivatives are entered into exclusively for hedging purposes. The currency and interest rate risk management of the Group is supported by an integrated Treasury system, which is used to identify, measure and analyze the Group currency exposure and interest rate risks. In this context, integrated means that the entire process from the initial recording of financial transactions to their entry in the accounts is covered. Much of the currency trading takes place on intranet-based, multi-bank dealing platforms. These foreign currency trans-

actions are automatically transferred into the Treasury system. The currency exposure and interest rate risks reported Financial Statements Consolidated by all subsidiaries under standardized reporting procedures are integrated into the Treasury system by data transfer. As a result, it is possible to retrieve and measure at any time all currency and interest rate risks across the Group and all derivatives entered into to hedge the exposure to these risks. The Treasury system supports the use of various risk concepts, so that, for example, the risk positions and the success of the risk management in each company, country and group of countries can be determined on a mark-to-market basis at any time and compared to a benchmark.

Henkel Annual Report 2006 101 Notes to the Consolidated Financial Statements

Recognition and measurement of financial instruments Financial assets are measured initially at cost. Securities for which the fair value can be reliably determined and other investments which are quoted on the stock exchange are categorized and recognized at fair value through profit or loss in accordance with IAS 39. Subsequent measurement at amortized cost applies only to those other investments in companies disclosed under non-current assets and to those securities held as current assets for which the fair value cannot be reliably determined. Changes in the value of all securities and investments in companies are recognized immediately in the statement of income under financial items. Shares in affiliated companies are measured at amortized cost. Long-term loans are accounted for at amortized cost.

Specific financial instruments by category in million euros Dec. 31, 2005 Dec. 31, 2006 Securities 989 748 – at fair value through profit or loss 989 748

Other investments/Shares in affiliated companies 145 66 – at fair value through profit or loss 78 6 – at amortized cost 67 60

Financial liabilities with a fixed maturity are measured at amortized cost using the effective interest method. Financial liabilities in respect of which a hedging transaction has been entered into, and which meet the conditions set out in IAS 39 regarding a hedging relationship, are measured under hedge accounting rules. All derivative financial instruments entered into by the Group are measured initially at cost and subsequently at their fair values on the balance sheet date. The accounting treatment of gains and losses on remeasurement to fair value depends on whether the conditions set out in IAS 39 with respect to hedge accounting have been met. Hedge accounting is not used for the majority of derivative financial instruments. The changes in the fair value of those derivatives which, from an economic point of view, represent effective hedges in line with the corporate strategy, are recognized in profit or loss. These are virtually matched by changes in the fair value of the hedged underlying transactions. Under hedge accounting, a derivative financial instrument is identified as a hedge of the exposure to changes in the fair value of an asset or a liability (fair value hedge), a hedge of the exposure to variability in future cash flows (cash flow hedge) or a hedge of a net investment in a foreign entity. Fair value hedges: The gain or loss from remeasuring derivatives used to hedge the exposure to changes in fair value is recognized in financial items in the statement of income together with the gain or loss on the hedged item. The interest rate derivatives entered into qualify as fair value hedges. To determine the fair value of the bonds (see Note 28, page 98), only that portion of the bond which relates to the hedged interest rate risk is taken into account. Interest rate hedging instruments at the balance sheet date had negative fair values of 45 million euros (2005: negative fair values of 38 million euros). The gain or loss on remeasuring the derivatives (2006: loss of 83 million euros, 2005: gain of 26 million euros) and the gain or loss on the hedged bonds (2006: gain of 79 million euros, 2005: loss of 26 million euros) have both been included in financial items in the statement of income. Cash flow hedges: Changes in the fair value of derivatives used to hedge the exposure to variability in cash flows are recognized directly in equity. The portion of the gain or loss on the derivative that is determined to be ineffective in respect of the risk being hedged is reported directly in the consolidated statement of income. If the firm commitment or an expected or highly probable future transaction results in the recognition of an asset or a liability, the accumulated gains or losses on the hedging instrument that were recognized directly in equity are included in the initial measurement of the asset or liability. Otherwise, the amounts recognized directly in equity are included in the statement of

102 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

income in those reporting periods in which the hedged transaction impacts the statement of income. In the past fiscal year, no cash flow hedges have been entered into and no amounts have been transferred from equity to the statement of income. Hedge of a net investment in a foreign entity: Hedges of net investments in foreign entities are accounted for similarly to cash flow hedges. This is the case with forward exchange contracts that are used to hedge the exposure to currency translation risks in foreign entities. As a result of the formally documented hedge accounting relationship, a loss of 20 million euros was recorded in equity at December 31, 2006 (2005: a loss of 23 million euros). The changes in fair value during fiscal 2006 were taken directly to gains and losses recognized in equity after taking account of deferred taxes (2006: a gain of 3 million euros, 2005: a loss of 36 million euros).

Fair values of derivative financial instruments The fair values of forward exchange contracts are calculated on the basis of current European Central Bank reference prices taking account of forward premiums and discounts. Currency options are measured using market quotations or recognized option pricing models. The fair values of interest rate hedging instruments are determined on the basis of discounted future expected cash flows using the ruling market interest rates over the remaining terms of the derivatives. These are shown in the table below for the four most important currencies. In each case these are the interest rates quoted on the inter-bank market at December 31.

Interest rates in percent per annum at December 31 EUR USD JPY GBP Maturities 2005 2006 2005 2006 2005 2006 2005 2006 3 months 2.47 3.71 4.52 5.33 0.04 0.54 4.57 5.26 6 months 2.61 3.84 4.66 5.33 0.06 0.61 4.54 5.39 1 year 2.82 4.02 4.81 5.31 0.11 0.73 4.53 5.51 2 years 3.03 4.11 4.81 5.16 0.36 0.93 4.56 5.51 5 years 3.21 4.09 4.84 5.07 0.95 1.38 4.56 5.37 10 years 3.44 4.16 4.89 5.18 1.62 1.84 4.48 5.07

Derivative financial instruments with a positive fair value at the balance sheet date are included in miscellaneous assets and those with a negative fair value are included in other liabilities. The following positions were held at the balance sheet date:

Derivative financial instruments at December 31 in million euros Nominal value Positive fair value Negative fair value 2005 2006 2005 2006 2005 2006 Forward exchange contracts1) 4,109 4,183 32 41 –106 –12 (of which for hedging loans within the Group) (2,883) (2,420) (23) (32) (–81) (–6) Currency options1) 6260–––– Interest rate swaps2) 1,650 1,650 38 – – –45

Cross currency swaps 11––––– Financial Statements Consolidated Total derivative financial instruments 5,832 5,893 70 41 –106 –57

1) maturity period < 1 year 2) maturity period > 1 year

Most of the forward exchange contracts and currency options hedge risks arising from trade accounts receivable and Group financing in US dollars.

Henkel Annual Report 2006 103 Notes to the Consolidated Financial Statements

Supplementary Information on the Statement of Income/Balance Sheet

(38) Cost of materials

Cost of materials in million euros 2005 2006 Cost of raw materials, supplies and merchandise 4,719 5,237 Cost of external services 285 324 Total 5,004 5,561

(39) Payroll costs

Payroll costs in million euros 2005 2006 Wages and salaries 1,818 1,856 Social security contributions and staff welfare costs 340 342 Pension costs 115 153 Total 2,273 2,351

Share-based payment plans The objective of the Henkel Stock Incentive Plan introduced in 2000 is to provide additional motivation for about 700 senior executive personnel around the world. Participants in the plan are granted option rights to subscribe for Henkel preferred shares, which may be exercised, once a vesting period of three years has elapsed, within a period not exceeding five years. Under the plan, rights were issued annually on a revolving basis, the relevant terms being revised each year by the Management Board and Shareholders’ Committee. In 2004, options were issued for the last time, in this case to the members of the Management Board. Each option granted carries the right to acquire up to eight Henkel preferred shares. The exact number of shares that can be bought per option at a specific price depends on whether and to what extent the performance targets are met. One target is based on absolute performance – the performance of the Henkel preferred share price. The other takes into account relative performance, comparing the movement in value of Henkel preferred shares with that of the Dow Jones Euro Stoxx 600 index. For both performance targets, the average market price of Henkel preferred shares at the date of issue is compared with the average market price three years later. The average market price is calculated in each case on the basis of 20 stock exchange trading days after the Annual General Meeting. For options issued prior to 2002, a period of 60 trading days is applied. The calculation of relative performance takes dividend payments and other rights and benefits into account as well as movements in the share price (total shareholder return). The subscription rights attached to an option are split into two categories. Up to five subscription rights can be exercised by reference to the absolute performance and up to three subscription rights by reference to the relative performance. Option rights are granted to members of the Management Board and heads of divisions, and to managers of com - parable status within German and foreign affiliated companies, on condition that they make a direct investment of one preferred share for each option. On February 19, 2004, IFRS 2 (Share-based Payment) was issued. We have applied this Standard effective January 1, 2005. As a result, the total value of stock options granted to senior executive personnel at the grant date is determined using an option pricing model. The total value of the stock options calculated in this way is treated as a payroll cost spread over the period in which the Company receives the service of the employee. For fiscal years from 2005 onward, this cost in respect of the option rights granted in 2003 (tranche 4) and 2004 (tranche 5) is required to be expensed.

104 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

The table shows the number of option rights granted per tranche and the number of shares in the various tranches for which the vesting period has expired. It also shows the expense for the period resulting from the valuation of each tranche issued. For the fourth tranche, management decided to avail itself in 2004 of the right to pay in cash the gain arising on the exercise of the options to the employees participating in the plan. The fifth tranche will be treated as if it is to be paid in shares, as Henkel may elect to pay the amount due either in shares or cash.

Options/subscribable shares in number of shares/options 1st tranche1) 2nd tranche1) 3rd tranche1) 4th tranche1) 5th tranche Total At January 1, 2006 56,170 66,277 87,265 115,950 12,600 338,262 expressed in shares 168,510 198,831 261,795 579,750 – 1,208,886 Options granted 315 2,625 5,160 – – 8,100 expressed in shares 945 7,875 15,480 – – 24,300 Options exercised2) 28,370 35,914 45,200 45,431 – 154,915 expressed in shares 85,110 107,742 135,600 227,155 – 555,607 Options forfeited 420 630 315 8,745 – 10,110 expressed in shares 1,260 1,890 945 43,725 – 47,820 At December 31, 2006 27,695 32,358 46,910 61,774 12,600 181,337 expressed in shares 83,085 97,074 140,730 308,870 – 629,759 of which held by the Management Board 1,460 1,460 7,200 9,000 12,600 31,720 expressed in shares 4,380 4,380 21,600 45,000 – 75,360 of which held by other senior executives 26,235 30,898 39,710 52,774 – 149,617 expressed in shares 78,705 92,694 119,130 263,870 – 554,399 Payroll costs 2006 in million euros – – – 7.5 0.3 7.8 Payroll costs 2005 in million euros – – – 12.9 0.3 13.2

1) number of exercisable options 2) average price at exercise date = 98.46 euros

At December 31, 2006, there is a provision of 16.6 million euros (2005: 17.1 million euros) in respect of the fourth tranche. The intrinsic value of the exercisable options in the fourth tranche at the end of the fiscal year is 16.6 million euros (2005: 15.9 million euros). The costs are calculated on the basis of the Black-Scholes option pricing model, modified to reflect the special features of the Stock Incentive Plan. The cost calculation was based on the following factors:

Black-Scholes option pricing model At Dec. 31, On issue On issue On issue 2006 On issue 1st tranche 2nd tranche 3rd tranche 4th tranche 5th tranche Exercise price in euros 63.13 71.23 74.67 57.66 71.28 Expected volatility of the share price in % 35.0 33.1 32.4 21.9 26.6 Expected volatility of the index in % 19.7 20.7 22.4 14.3 18.6 Expected lapse rate in % 333–– Consolidated Financial Statements Consolidated Risk-free interest rate in % 5.19 4.18 4.78 3.69 3.96

The expected volatility rates are based on the historic volatility of the Henkel preferred share and of the DJ Stoxx index. The period to which the estimate of the volatility of the Henkel share relates starts at the beginning of the remaining term of the option tranche and finishes on the date on which the tranche is valued.

Henkel Annual Report 2006 105 Notes to the Consolidated Financial Statements

The performance period relating to the first tranche ended on July 10, 2003, that of the second tranche on July 12, 2004, that of the third tranche on May 16, 2005 and that of the fourth tranche on May 11, 2006. Hereafter, at any time during a five-year period, the option holders in the first three tranches may exercise their right to acquire three Henkel preferred shares per option. In the case of the fourth tranche, the option holders may acquire five shares per option. The allocation of three shares per option was made solely as a result of the Henkel preferred share outperforming the comparative index (relative performance). The allocation for the fourth tranche was made solely as a result of the absolute performance of the shares. The absolute performance targets were not met for the first three tranches and the relative performance target was not met for the fourth tranche. The options may be exercised at any time, except during blocked periods which cover the four weeks prior to the public reporting dates of the Company.

Global Cash Performance Units (CPU) Plan Since the end of the Stock Incentive Plan in 2004, those eligible for that plan, the senior executive personnel of the Henkel Group (excluding members of the Management Board) have been part of the Global CPU Plan, which enables them to participate in any increase in price of Henkel preferred shares. If certain set targets are achieved, Cash Performance Units (CPUs) are granted, which give the member of the CPU Plan the right to receive a cash payment at a fixed point in time. The CPUs are granted on condition that the member of the plan is employed for three years by Henkel KGaA or one of its subsidiaries in a position senior enough to qualify to take part and that he or she is not under notice during that period. This minimum period of employment pertains to the calendar year in which the CPUs are granted and the two subsequent calendar years. The number of CPUs granted depends not only on the seniority of the position of the executive, but also on achieving set target figures. For the periods to date, these targets have been operating profit (EBIT) and net earnings after minority interests. The value of a CPU in each case is the average price of the Henkel preferred share 20 stock exchange trading days after the Annual General Meeting following the performance period. In the case of exceptional increases in the share price, there is an upper limit or cap. The total value of CPUs granted to senior executive personnel is remeasured at each balance sheet date and treated as a payroll cost over the period in which the plan member provides his or her services to Henkel. Across the world, at December 31, 2006, the CPU Plan comprised 116,000 CPUs issued in the first tranche in 2004 (expense: 5.9 million euros), 109,000 CPUs from the second tranche issued in 2005 (expense: 4.9 million euros) and 120,000 from the third tranche issued in 2006 (expense: 4.5 million euros). The corresponding provision amounted to 25.6 million euros (2005: 10.3 million euros).

Cash Performance Units Program For members of the Management Board, the Stock Incentive Plan was superseded in 2005 by a new program. Under this, each eligible member of the Management Board is entitled to the monetary value of a total of up to 3,600 Henkel preferred shares for each fiscal year or tranche, depending on the increase in share price over a period of three years (the performance period) and on the increase in earnings per preferred share. At the end of the performance period, the actual number and value of the shares is determined and the resulting tranche income paid net and in cash. Each member of the Management Board participating in the tranche must personally invest in Henkel preferred shares to the value of 25 percent of the tranche income and place these in a blocked custody account with a five-year drawing restriction. If there is an absolute increase in share price during the performance period of at least 15 percent, 21 percent or 30 percent, each participant in the plan receives the monetary value equivalent to 600, 1,200 or 1,800 shares respectively. To calculate the increase in the share price, the average price in January of the year of issue of a tranche (base price) is compared with the average price in January of the third fiscal year following the year of issue (reference price). If the earnings per preferred share increase by at least 15 percent, 21 percent or 30 percent during the performance period, each participant receives the monetary value equivalent to 600, 1,200 or 1,800 shares respectively. To calculate the increase in earnings per preferred share, the earnings per preferred share of the fiscal year prior to the year of issue is compared with the earnings per preferred share of the second fiscal year after the year of issue. The amounts included in the calculation of the increase are in each case the earnings per preferred share as disclosed in the consolidated financial statements of the relevant fiscal years, adjusted for exceptional items. The financial statements must have been approved and an unqualified

106 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

auditors’ opinion issued thereon. The monetary value of a share is equivalent to the reference price of the Henkel preferred share. In the case of exceptional increases in the share price, there is an upper limit or cap. The base prices for the 2005 and 2006 tranches were 66.42 euros and 88.05 euros respectively. We have based the measurement of the provision for this program on achieving intermediate targets. This led to an expense of 1.8 million euros in the fiscal year. The provision at December 31, 2006 for all the tranches issued was 2.0 million euros (2005: 0.2 million euros).

(40) Employee numbers Annual average excluding apprentices and trainees, work experience students and interns, based on quarterly figures.

Employee numbers 2005 2006 Production and engineering 24,450 23,934 Marketing, selling and distribution 15,228 16,177 Research and development 2,815 2,794 Administration 9,231 8,811 Total 51,724 51,716

(41) Value added statement

Value added statement in million euros 2005 in % 2006 in % Total sales/income 12,236 100.0 13,220 100.0 Other charges Cost of materials 5,004 40.9 5,561 42.1 Amortization/depreciation of non-current assets 334 2.7 350 2.6 Other expenses 3,257 26.6 3,489 26.4 Value added 3,641 29.8 3,820 28.9 Paid to employees 2,273 62.4 2,351 61.6 central and local government 318 8.7 351 9.2 Providers of capital interest expense 280 7.7 247 6.5 shareholders 193 5.3 214 5.6 minority shareholders 13 0.4 16 0.4 Reinvested in the Group 564 15.5 641 16.7

(42) Segment information The primary format for reporting the activities of the Henkel Group by segment is by business sector and the secondary format is by geographical region. This classification is linked to the Group’s internal management systems for its operat-

ing business. Financial Statements Consolidated The activities of the Henkel Group are analyzed between the following segments: Laundry & Home Care, Cosmetics/ Toiletries, Consumer and Craftsmen Adhesives, Henkel Technologies and Corporate.

Laundry & Home Care This business sector produces and sells detergents, laundry care products, dishwashing and cleaning products and insecticides.

Henkel Annual Report 2006 107 Notes to the Consolidated Financial Statements

Cosmetics/Toiletries The product range of this business sector comprises hair cosmetics, body care, skin care and oral care products, and hair salon products.

Consumer and Craftsmen Adhesives This business sector produces and sells cyanoacrylates, office products for gluing and correcting applications, adhesive tapes, high-strength contact adhesives, and adhesives for home decoration, building and DIY applications.

Henkel Technologies This sector produces and supplies adhesives, sealants and products for surface treatment.

Corporate Group overheads and Central Research costs are incorporated into this segment, together with income and expenses that cannot be allocated to individual business sectors.

Reconciliation between net operating assets/capital employed and balance sheet figures in million euros Net operating assets Balance sheet Annual average1) 2006 Dec. 31, 2006 Dec. 31, 2006 Goodwill at book value 3,871 3,782 3,782 Goodwill at book value Other intangible assets and property, Other intangible assets and property, plant and equipment (total) 3,777 3,783 3,783 plant and equipment (total) 565 Financial assets 363 Deferred tax assets Inventories 1,348 1,325 1,325 Inventories Trade accounts receivable Trade accounts receivable from third parties 1,995 1,868 1,868 from third parties Intra-Group trade accounts receivable 775 732 Other receivables and Other receivables and miscellaneous assets2) 420 367 717 miscellaneous assets 929 Liquid funds/Marketable securities

Assets held for sale 14 Operating assets (gross) 12,186 11,857 13,346 Total assets – Operating liabilities 3,588 3,499 of which Trade accounts payable Trade accounts payable to third parties 1,511 1,494 1,494 to third parties Intra-Group trade accounts payable 775 732 Other provisions and Other provisions and other liabilities2) 1,302 1,273 1,756 other liabilities Net operating assets 8,598 8,358 – Goodwill at book value 3,871 + Goodwill at cost 4,228 Capital employed 8,955

1) The annual average is calculated on the basis of the twelve monthly figures. 2) Only amounts relating to operating activities are taken into account in calculating net operating assets.

108 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

(43) Information on earnings per share The Stock Incentive Plan (Note 39, page 104 ff.) currently results in a dilution of earnings per share of 4 eurocents.

Earnings per share in million euros (rounded) 2005 2006 Net earnings after minority interests 757 855 Dividends ordinary shares 113 125 Dividends preferred shares 77 86 Total dividends 190 211 Retained profit per ordinary share 342 388 Retained profit per preferred share 225 256 Retained profit 567 644 Number of ordinary shares 86,598,625 86,598,625 Dividend per ordinary share 1.30 1.44 Retained profit per ordinary share 3.95 4.48 EPS per ordinary share in euros 5.25 5.92 Number of outstanding preferred shares1) 56,921,997 57,271,306 Dividend per preferred share 1.36 1.50 Retained profit per preferred share 3.95 4.48 EPS per preferred share in euros 5.31 5.98 Number of potential outstanding preferred shares2) 57,192,167 57,628,356 Dividend per preferred share 1.36 1.50 Retained profit per preferred share 3.92 4.44 Diluted EPS per preferred share in euros3) 5.28 5.94 1) weighted annual average of preferred shares (Henkel buy-back program) 2) weighted annual average of preferred shares adjusted for the potential number of shares arising from the Stock Incentive Plan 3) based on earnings after minority interests of 854 million euros (IAS 33.59 on share option schemes)

(44) Information on the cash flow statement Cash flow from investing activities/acquisitions includes under the heading “Purchase of financial assets/acquisitions” the funds used to make acquisitions in order to expand the operations of the business sectors of 400 million euros (2005: 85 million euros). Of this amount, 4 million euros related to the Laundry & Home Care business sector (2005: 14 million euros), 326 million euros to Cosmetics/Toiletries (2005: 2 million euros), 35 million euros to Consumer and Craftsmen Adhesives (2005: 45 million euros) and 35 million euros to Henkel Technologies (2005: 24 million euros). The heading “Dividends and interest paid and received” includes dividends from Ecolab Inc. of 24 million euros (2005: 17 million euros).

(45) Related party transactions Information required by § 160(1) No. 8 of the German Stock Corporation Act (AktG): The Company has been notified that since July 8, 2004, a total of 44,583,767 votes, representing in total 51.48 percent of the voting rights in Henkel KGaA, are held by:

>> 62 members of the families of the descendants of Fritz Henkel, the Company’s founder Financial Statements Consolidated >> two foundations set up by members of those families >> one civil-law partnership set up by members of those families, and >> 14 private limited companies set up by members of those families and one limited partnership with a limited company as general partner (GmbH & Co. KG) under the terms of a share-pooling agreement (agreement restricting the transfer of shares) as envisaged in § 22 (2) of the German Securities Trading Law (WpHG), whereby the shares held by the 14 private limited companies and by the limited partnership representing 17.74 percent are attributed (as envisaged in § 22(1) No. 1 WpHG) to the family members who control those companies

Henkel Annual Report 2006 109 Notes to the Consolidated Financial Statements

Jahr Vermögensverwaltung GmbH & Co. KG has informed us that it holds 5,290,000 ordinary shares in Henkel KGaA (6.11 percent of the voting capital of Henkel KGaA), thereby exceeding the threshold of 5 percent of the total voting rights in Henkel KGaA. Jahr Vermögensverwaltung GmbH & Co. KG has undertaken, under the terms of an agreement concluded with the parties to the Henkel share-pooling agreement, to exercise its voting rights at the Annual General Meeting of Henkel KGaA in concert with the parties to the Henkel share-pooling agreement whenever the latter have decided to cast all their votes in the same way. Under § 22(2) WpHG, this agreement means that the voting rights in Henkel KGaA held by the parties to the Henkel share-pooling agreement and by Jahr Vermögensverwaltung GmbH & Co. KG (which together represent 57.59 percent of the total voting rights) are attributable to each other. As in the case of Jahr Vermögensverwaltung GmbH & Co. KG, the 5 percent threshold of voting rights in Henkel KGaA is exceeded by Dr. Christoph Henkel, with voting rights attached to 5,044,139 ordinary shares in Henkel KGaA (representing a rounded percentage of 5.825 percent). No other party to the share-pooling agreement has 5 percent or more of the total voting rights in Henkel KGaA, even after adding voting rights expressly granted under the terms of usufruct agreements. Mr. Albrecht Woeste, Düsseldorf, is the authorized representative of the parties to the Henkel share-pooling agreement. Members of the families of the descendants of Fritz Henkel, the Company’s founder, who hold shares in Henkel KGaA, and members of the Shareholders’ Committee advanced funds on loan to the Henkel Group in the year under review, on which interest has been payable at an average rate of 3.03 percent (2005: 2.31 percent). The average total amount of capital advanced to the Henkel Group in fiscal 2006 was 436 million euros (2005: 377 million euros), while the balance at December 31, 2006 was 467 million euros (December 31, 2005: 376 million euros). Members of the Supervisory Board who are not also members of the Shareholders’ Committee advanced funds on loan to the Henkel Group in the year under review averaging 6.5 million euros (2005: 6 million euros), while the balance at December 31, 2006 was 2 million euros (December 31, 2005: 4 million euros) at an average interest rate of 3.03 percent (2005: 2.31 percent). At December 31, 2006, a loan to a member of the Management Board for 301,000 euros was included in miscellaneous assets. The loan is secured by a real estate mortgage and has a residual term of 3 years. During the fiscal year, mortgage payments totaling 100,000 euros were made in respect of this loan. The loan is subject to interest at the German Federal Bank base rate up to a maximum of 5 percent. In addition to the above, some companies in the Henkel Group and the associated company Ecolab Inc. have supplied goods and services to each other on prevailing market terms during the course of normal business activities.

(46) Emoluments of the corporate bodies The total remunerations of the members of the Supervisory Board amounted to 1,163k euros (2005: 1,256k euros), those of the Shareholders’ Committee amounted to 2,273k euros (2005: 2,350k euros) and those of the Management Board amounted to 15,431k euros (2005: 14,153k euros). For further details regarding the emoluments of the corporate bodies, see the Remuneration Report on page 22.

(47) Declaration of compliance with the German Corporate Governance Code In February 2006, the Management Board, Supervisory Board and Shareholders’ Committee approved a joint declaration of compliance with the recommendations of the German Corporate Governance Code in accordance with § 161 of the German Stock Corporation Act (AktG). The declaration has been made permanently available to shareholders on the Company website: www.henkel.com/ir.

(48) Principal subsidiary companies and groups of companies Details relating to the investments held by Henkel KGaA and the Henkel Group are provided in a separate schedule which is available via the Commercial Register and can also be inspected at the Annual General Meeting.

110 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

(49) Information on shares in affiliated companies and other investments In each of the following companies, Henkel holds, either directly or indirectly, not more than half of the shares, but has the power to govern the financial and operating policies of the company. Therefore the company is consolidated.

Holding in % Austria Biozym GmbH Kundl 49.00 Bahrain Henkel Adhesives Middle East E.C. Bur Dubai 50.00 Egypt Henkel Adhesives Trading Egypt SAE Cairo 50.00 Henkel Polybit Egypt Co. Ltd. Badr City 49.00 Henkel Technologies Egypt SAE Cairo 50.00 India Henkel Marketing India Ltd. Hyderabad 48.94 Lebanon Detergenta Holding S.A.L. Beirut 49.97 Henkel Lebanon S.A.L. Beirut 50.00 Mauritius Henkel Chemicals (Mauritius) Ltd. Port Louis 38.30 Saudi Arabia Ashwa Technologies Ltd. Jeddah 50.00 Saudi Arabian Adhesives Factory Ltd. Riyadh 50.00 Syria Henkel Syria S.A.S. Aleppo 49.97 Tunisia Société d’Importation et de Ventes d’Article Chimiques Tunis 24.99 Turkey Eczacibasi Schwarzkopf Kuafor Urunleri Pazarlama A.S. Istanbul 50.00 United Arab Emirates Henkel Polybit Industries Co. Ltd. Umm Al Quwain 49.00 Roof Care Co. Sharjah 49.00

The following dormant companies or companies with insignificant operations are immaterial to the net assets, financial position and results of operations of the Group and are stated at amortized cost:

Holding in % Argentina The Dial Corporation Argentina S.A. Buenos Aires 100.00 Austria Persil-Altersunterstützung GmbH Vienna 100.00 Schwarzkopf & Henkel GmbH Vienna 100.00 Bermuda Henkel Overseas Ltd. Hamilton 100.00 China Henkel Loctite Hong Kong Ltd. Hong Kong 100.00 Shanghai Henkel Xianghua Adhesives Co. Ltd. Shanghai 70.00 Egypt Henkel Building Chemicals Egypt SAE Alexandria 72.69 Germany CHEMPHAR Handels- und Exportgesellschaft mbH Hamburg 100.00 Clynol GmbH Hamburg 100.00 Entsorgungszentrum Düsseldorf Süd GmbH Düsseldorf 50.00 Erste Deutsche Walfang GmbH Hamburg 100.00 Fandus Grundstücksvermietungsgesellschaft mbH & Co. Objekt Willich KG Düsseldorf 68.62 Fix Point Vertriebs GmbH Dinslaken 73.00 Forstverwaltung Brannenburg Geschäftsführungs-GmbH Düsseldorf 100.00 Consolidated Financial Statements Consolidated Forstverwaltung Brannenburg GmbH & Co. OHG Brannenburg 100.00 Hans Schwarzkopf & Henkel Verwaltungs-GmbH Grünwald 100.00 Henkel AWARE Technologies GmbH Heidelberg 51.00 Henkel Erste Verwaltungsgesellschaft mbH Düsseldorf 100.00 Henkel Holding Verwaltungs-GmbH Düsseldorf 100.00 Henkel Wasch- und Reinigungsmittel GmbH Düsseldorf 100.00 Henkel Zweite Verwaltungsgesellschaft mbH Düsseldorf 100.00

Henkel Annual Report 2006 111 Notes to the Consolidated Financial Statements

Holding in % Germany (continued) Indola GmbH Hamburg 100.00 MATERNA Grundstücks- Vermietungsgesellschaft mbH & Co. OHG Schönefeld 99.00 Phenion GmbH & Co. KG Düsseldorf 100.00 Phenion Verwaltungs GmbH Düsseldorf 100.00 Schwarzkopf & Henkel GmbH Düsseldorf 100.00 Schwarzkopf & Henkel Production Management GmbH Düsseldorf 100.00 Sovereign Specialty Chemicals GmbH Düren 100.00 SusTech GmbH & Co. KG Darmstadt 61.96 SusTech Verwaltungs GmbH Darmstadt 64.29 Great Britain Clynol Ltd. Hatfield 100.00 Kelsey Industries Hatfield 100.00 Schwarzkopf Ltd. Aylesbury 100.00 Ten Lifestyle Management Ltd. London 50.24 Iran Iran Henkel AG Tehran 100.00 Pharco Chemie AG Tehran 100.00 Ireland Chambois Ltd. Cork 100.00 Loctite (Ireland) Asia Pacific Ltd. Dublin 100.00 Loctite (Ireland) Holding Ltd. Dublin 100.00 Kazakhstan Henkel Bautechnik Kazakhstan TOO Almaty 60.00 Henkel Central Asia & Caucasus TOO Almaty 100.00 Philippines Novamax Technologies (Philippines). Inc. Manila 100.00 Singapore Sovereign Specialty Chemicals (S) Pte. Ltd. Singapore 100.00 Slovenia Henkel Storitve d.o.o. Maribor 100.00 Switzerland Steinfels Haushalt AG Pratteln 100.00 Taiwan Accurus Scientific Co. Ltd. Tainan 99.89 USA Dial Argentina Holdings. Inc. Phoenix 100.00 FP Chemical Products L.P. Wilmington 100.00 Pure & Natural Company Phoenix 100.00 Zimbabwe Henkel Zimbabwe (Private) Ltd. Harare 76.60

Henkel holds more than 20 percent but less than 50 percent in the following companies, either directly or indirectly. As the holdings are immaterial to the net assets, financial position and results of operations of the Group, they are stated at amortized cost.

Holding in % France Natural Implant S.A. Brest 24.79 Germany DATASOUND Gesellschaft zur Entwicklung und Vermark- Ludwigshafen 24.98 tung digitaler Audio- und Informationssysteme mbH Nordic Adhesive Technology GmbH Buxtehude 24.80 Great Britain Time Energy Network Ltd. London 44.26 Guatemala Tanques del Atlantico S.A. Guatemala City 30.00 Mexico Hysol Indael de Mexico S.A. de C.V. Mexico City 49.00 USA AMT Capital L.P. Dallas 20.90

112 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

(50) Shares in associated companies

Ecolab Inc., St. Paul, Minnesota, USA Product groups: Products and services for industrial and institutional hygiene, catering, food and textile hygiene, vehicle cleaning and automotive care, water treatment, pest control, commercial kitchen service. >> Henkel owns 72.7 million shares in Ecolab Inc., which represents an interest of 28.9 percent. >> We expect a 7 percent increase in sales to 4.9 billion US dollars in fiscal 2006. >> The share price of Ecolab Inc. rose by 24.6 percent in 2006. The market value of our investment at December 31, 2006 was 3,286 million US dollars (2005: 2,637 million US dollars). This is equivalent to 2,495 million euros (2005: 2,235 million euros). >> We anticipate that actuarial losses of 200 million US dollars will be offset in equity in the financial statements of Ecolab Inc. We have taken this into consideration when accounting for Ecolab Inc. using the equity method.

(51) Auditors’ fees and services The fees charged for the services of the auditors KPMG in the 2005 and 2006 fiscal years were as follows:

Type of fees in million euros 2005 2006 Audit (including outlays) 8.3 8.0 Audit-related services 0.3 0.4 Tax advisory services 0.1 0.0 Other services 0.3 0.2 Total 9.0 8.6

Audit fees comprise the total fees (including outlays) paid or payable to the KPMG organization in respect of the audit of the Group accounts and reporting thereon, and the audit of the individual company financial statements of Henkel KGaA and its affiliated companies as required by law. Fees for audit-related services comprise fees for audits in connection with information risk management and of compliance with contractual terms and conditions. Tax advisory services include fees for tax advice relating to employees of Henkel KGaA who live outside Germany and for employees of Henkel sent from Germany to work in Group companies outside Germany (International Executive Services). Other services comprise fees for agreed-upon procedures and support for process improvement activities.

(52) Events after the balance sheet date We announced the closure of our Spanish cosmetics site in La Coruña to employee representatives at the end of December 2006 and to the workforce at the beginning of January 2007. At the end of January, Henkel North America decided to analyze the effectiveness and efficiency of the processes in the finance, personnel and purchasing departments and to take appropriate measures as a result. The investigation will also examine the concentration of activities in Shared Service Centers and review the relocation to appropriate sites

outside North America, including site closures. Financial Statements Consolidated

Henkel Annual Report 2006 113 Notes to the Consolidated Financial Statements

Recommendation for the Approval of the Annual Financial Statements and the Appropriation of the Profit of Henkel KGaA

It is proposed that the annual financial statements of Henkel KGaA be approved as presented and that the unappropriated profit of 363,679,361.44 euros for the year ended December 31, 2006 be applied as follows: a) Payment of a dividend of 1.44 euros per ordinary share on 86,598,625 shares = 124,702,020.00 euros b) Payment of a dividend of 1.50 euros per preferred share on 59,387,625 shares = 89,081,437.50 euros c) Carry-forward of the remaining amount of 149,895,903.94 euros to the following year (retained earnings) 363,679,361.44 euros

Treasury stocks are not entitled to dividend. The amount in unappropriated profit which relates to the treasury stock held by the Company at the date of the Annual General Meeting is carried forward to the following year.

Düsseldorf, January 30, 2007

The personally liable managing Prof. Dr. Ulrich Lehner (Chairman) partners of Henkel KGaA Dr. Jochen Krautter

114 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

Annual Financial Statements of Henkel KGaA (summarized)1)

Statement of Income in million euros 2005 2006 Sales 2,653 2,911 Cost of sales –1,7982) –1,956 Gross profit 855 955 Selling, research and administrative expenses –1,0142) –1,183 Other income (net of other expenses) 2352) 296 Operating profit 76 68 Financial items 373 294 Profit on ordinary activities 449 362 Remeasurement of pension provisions –502 – Change in special accounts with reserve element 13 23 Earnings before tax –40 385 Taxes on income –47 –22 Net loss/earnings –87 363 Transfer from revenue reserves 280 – Unappropriated profit3) 193 363

Balance Sheet in million euros 2005 2006 Property, plant & equipment and intangible assets 654 671 Financial assets 7,949 8,047 Non-current assets 8,603 8,718 Inventories 176 214 Receivables and miscellaneous assets/ Deferred charges 2,625 3,454 Marketable securities 163 129 Liquid funds 72 9 Current assets 3,036 3,806 Total assets 11,639 12,524 Shareholders’ equity 3,783 3,956 Special accounts with reserve element 248 241 Provisions 2,349 2,425 Liabilities 5,259 5,902 Total equity and liabilities 11,639 12,524

The full financial statements of Henkel KGaA with the auditors’ unqualified opinion are published in the Bundesanzeiger (German Federal Gazette) and filed Financial Statements Consolidated with the Commercial Register; copies can be obtained from Henkel KGaA on request. 2) The current restructuring costs from 2005 have been allocated to the appropriate individual functions in the statement of income. 3) Statement of income figures are rounded; unappropriated profit 193,345,382.50 euros for 2005 and 363,679,361.44 euros for 2006.

Henkel Annual Report 2006 115 Notes to the Consolidated Financial Statements

Statement by the Management Board

The personally liable managing partners of Henkel KGaA are responsible for the preparation of the annual financial statements and the consolidated financial statements and the management reports of Henkel KGaA and the Group. The annual financial statements, the consolidated financial statements and the management reports have been unanimously approved by the members of the Management Board. The consolidated financial statements have been prepared on the basis of International Financing Reporting Stand- ards (IFRS). The Management Board has taken steps to ensure the integrity of the reporting process and compliance with the relevant legal regulations by establishing effective internal control systems at the companies which are included in the consolidated financial statements. Appropriate training is provided to make sure that the employees responsible are suitably qualified to meet the required standards. Staff training is centered around the Company’s mission statement and principles and strategies developed within the Company. Compliance with these principles is continually monitored by the Management Board. Compliance with regulations and the reliability and functional efficiency of the control systems are kept under constant review across the Group by the Internal Audit department. These measures, coupled with reporting procedures based on standard guidelines throughout the Group, ensure that the financial records properly reflect all business transactions. They also enable the Management Board to recognize changes in business circumstances and the ensuing risks to assets and financial arrangements as they occur. The risk management systems in place for Henkel KGaA and the Henkel Group ensure, in accordance with the requirements of company law, that any developments which could endanger the future of Henkel KGaA or of the Henkel Group are recognized in good time and that appropriate measures can be taken where necessary. They also provide the foundation for the accuracy of information disclosed in the consolidated financial statements and Group management report and in the individual company financial statements incorporated therein. The Management Board is committed to delivering a steady increase in shareholder value. The Group is managed on principles of sustainable development in the interests of shareholders and in full awareness of its responsibility toward employees, society and the environment in every country in which Henkel operates. As required by § 161 of the German Stock Corporation Act (AktG), the Management Board, the Supervisory Board and the Shareholders’ Committee have approved a joint declaration of compliance with the recommendations of the German Corporate Governance Code. KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, in accordance with a resolution adopted by shareholders at the Annual General Meeting and as instructed by the Supervisory Board, has audited the annual financial statements, the consolidated financial statements and the related management reports. The auditors’ report on the consolidated financial statements and the Group management report is reproduced on page 117. The annual financial statements, the consolidated financial statements, the management reports for Henkel KGaA and the Group and the audit reports will be discussed in detail, with the auditors present, at a meeting of the Supervisory Board held for that purpose.

Düsseldorf, January 30, 2007

The Management Board of Henkel KGaA

116 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

Auditors’ Report

We have audited the consolidated financial statements prepared by Henkel Kommanditgesellschaft auf Aktien (Henkel KGaA), comprising the balance sheet and the related statements of income, recognized income and expense and cash flows, and the notes to the consolidated financial statements, together with the Group management report for the business year from January 1, 2006 to December 31, 2006. The preparation of the consolidated financial statements and the Group management report in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, and the additional requirements of German commercial law pursuant to § 315a(1) HGB (German Commercial Code) are the responsibility of the legal representatives of the Company. Our responsibility is to express an opinion on the consolidated financial statements and on the Group management report based on our audit. In addition, we have been instructed to express an opinion as to whether the consolidated financial statements comply with full IFRS. We conducted our audit of the consolidated financial statements in accordance with § 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW) and in supplementary compliance with International Standards on Auditing (ISA). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements prepared in accordance with the applicable financial reporting framework, and in the Group management report are detected with reasonable assurance. Knowledge of the business activities and of the economic and legal environment in which the Henkel Group operates and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and Group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in the consolidated financial statements, the determination of the entities to be included in the consolidation, the accounting and consolidation principles used and significant estimates made by the Company’s legal representatives, as well as evaluating the overall presentation of the consolidated financial statements and Group management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, based on the findings of our audit, the consolidated financial statements comply with International Financial Reporting Standards as adopted by the European Union, the additional requirements of German commercial law pursuant to § 315a(1) HGB and with full IFRS and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The Group management report is consistent with the consolidated financial statements, and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks associated with the Group’s future development.

Düsseldorf, January 30, 2007

KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft

Wirtschaftsprüfungsgesellschaft Financial Statements Consolidated

Rüdiger Reinke Michael Gewehr Wirtschaftsprüfer Wirtschaftsprüfer

Henkel Annual Report 2006 117 Notes to the Consolidated Financial Statements

Corporate Management of Henkel KGaA Boards/memberships as defined by § 125 (1), sentence 3, German Stock Corporation Act (AktG) as at January 2007

Supervisory Board Membership of statutory Membership of comparable supervisory boards supervisory bodies Dipl.-Ing. Albrecht Woeste Chairman, Private Investor, Düsseldorf Born in 1935 Member since June 27, 1988 Winfried Zander Vice-Chairman, Chairman of the Works Council of Henkel KGaA, Düsseldorf Born in 1954 Member since May 17, 1993 Dr. Friderike Bagel Attorney at Law/Tax Consultant, Cologne Born in 1971 Member since April 18, 2005 Engelbert Bäßler Member of the Works Council of Henkel KGaA, Düsseldorf Born in 1951 Member since March 1, 2005 Hans Dietrichs Chairman of the Works Council of Henkel KGaA, Genthin Born in 1943 Member since May 4, 1998 Benedikt-Joachim Freiherr von Herman Holzhof Oberschwaben eG (until April 10, 2006) Forester, Wain Born in 1941 Member since December 3, 1990 Bernd Hinz Vice-Chairman of the Works Council of Henkel KGaA, Düsseldorf Born in 1951 Member since May 4, 1998 Thomas Manchot (since April 10, 2006) Private Investor, Düsseldorf Born in 1965 Member since April 10, 2006 Prof. Dr. Dr. h.c. mult. Heribert Meffert BASF Coatings AG, UNIPLAN International GmbH & Co. KG Former Director of the Institute of Kaufhof Warenhaus AG Marketing, University of Münster, Born in 1937 Member since May 4, 1998

118 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

Supervisory Board (continued) Membership of statutory Membership of comparable supervisory boards supervisory bodies Andrea Pichottka Siltronic AG Secretariat of the General Executive of IG Bergbau, Chemie, Energie, responsible for research/technology, women/equal opportunities, employees, advertising Hanover Born in 1959 Member since October 26, 2004 Prof. Dr. Dr. h.c. mult. Altana AG, HBM BioVentures AG, Switzerland, Heinz Riesenhuber Evotec AG (Chairman), Heidelberg Innovation BioScience, Former Federal Minister for Research Kabel Deutschland GmbH (Chairman), Venture II GmbH & Co. KG and Technology, Frankfurt/Main VfW AG (Vice-Chairman), Born in 1935 Vodafone Deutschland GmbH Member since May 4, 1998 Heinrich Thorbecke In Gassen Immobilien AG, Switzerland, (until April 10, 2006) Intervalor Holding AG, Switzerland, Private Investor, St. Gallen Kursana AG, Switzerland Born in 1936 Member since May 4, 1998 Konstantin von Unger Ten Lifestyle Management Ltd., UK (since April 10, 2006) Founding Partner Blue Corporate Finance, London Born in 1966 Member since April 10, 2006 Michael Vassiliadis BASF AG, Member of the Executive Committee of K + S AG (Vice-Chairman), IG Bergbau, Chemie, Energie, Hanover K + S Kali GmbH (Vice-Chairman), Born in 1964 STEAG AG Member since May 4, 1998 Bernhard Walter Bilfinger Berger AG (Chairman), Former Chairman of DaimlerChrysler AG, Dresdner Bank AG, Frankfurt/Main Deutsche Telekom AG, Born in 1942 Staatliche Porzellan-Manufaktur Member since May 4, 1998 Meissen GmbH (Vice-Chairman), Wintershall AG (Vice-Chairman) Werner Wenning Bayer Group mandate: Chairman of the Executive Board of Bayer Schering Pharma AG Bayer AG, Leverkusen Born in 1946 Member since April 14, 2003 Dr. Anneliese Wilsch-Irrgang Chemist, Düsseldorf Representative of the Senior Staff of Henkel KGaA Born in 1958 Member since May 4, 1998

Rolf Zimmermann Financial Statements Consolidated Member of the Works Council of Henkel KGaA, Düsseldorf Born in 1953 Member from October 9, 2002

Henkel Annual Report 2006 119 Notes to the Consolidated Financial Statements

Shareholders’ Committee Membership of statutory Membership of comparable supervisory boards supervisory bodies Dipl.-Ing. Albrecht Woeste Chairman, Private Investor, Düsseldorf Born in 1935 Member since June 14, 1976 Stefan Hamelmann Ecolab Inc., USA Vice-Chairman Private Investor, Düsseldorf Born in 1963 Member since May 3, 1999 Dr. h.c. Christoph Henkel Vice-Chairman Managing Partner Canyon Equity LLC, San Francisco Born in 1958 Member since May 27, 1991 Dr. Paul Achleitner Bayer AG, Allianz Group mandates: Member of the Board of Allianz SE, RWE AG Allianz Elementar Versicherungs-AG, Munich Allianz Group mandates: Austria (Chairman), Born in 1956 Allianz Deutschland AG, Allianz Elementar Member since April 30, 2001 Allianz Global Investors AG, Lebens versicherungs-AG, Allianz Lebensversicherungs AG Austria (Chairman) Dr. Simone Bagel-Trah Private Investor, Düsseldorf Born in 1969 Member since April 18, 2005 Dr. h.c. Ulrich Hartmann Deutsche Bank AG, Chairman of the Supervisory Board of Deutsche Lufthansa AG, E.ON AG, Düsseldorf E.ON AG (Chairman), Born in 1938 Hochtief AG, Member since May 4, 1998 IKB Deutsche Industriebank AG (Chairman), Münchener Rückversicherungs- Gesellschaft AG Burkhard Schmidt Druck- und Verlagshaus Managing Director of Gruner + Jahr AG Jahr Vermögensverwaltung GmbH & Co. KG, Hamburg Born in 1960 Member since June 23, 1999 Konstantin von Unger Ten Lifestyle Management Ltd., UK Founding Partner Blue Corporate Finance, London Born in 1966 Member since April 14, 2003 Karel Vuursteen Akzo Nobel nv, Netherlands, Former Chairman of the Executive Board Heineken Holding N.V., Netherlands, of Heineken N.V., Amsterdam ING Groep nv, Netherlands Born in 1941 Member since May 6, 2002 Dr. Hans-Dietrich Winkhaus BMW AG, Former President and Deutsche Lufthansa AG, Chief Executive Officer of Henkel KGaA Ergo Versicherungsgruppe AG Düsseldorf Born in 1937 Member since May 8, 2000

120 Henkel Annual Report 2006 Notes to the Consolidated Financial Statements

Subcommittees of the Shareholders’ Committee Functions Members Finance Subcommittee The Finance Subcommittee deals principally Dr. h.c. Christoph Henkel, Chairman with financial matters, accounting issues Stefan Hamelmann, Vice-Chairman including the statutory year-end audit, Dr. Paul Achleitner taxation and accounting policy, and risk Burkhard Schmidt management in the corporation. Dr. Hans-Dietrich Winkhaus Human Resources Subcommittee The Human Resources Subcommittee deals Dipl.-Ing. Albrecht Woeste, Chairman principally with personnel matters for Konstantin von Unger, Vice-Chairman members of the Management Board, Dr. Simone Bagel-Trah issues relating to human resources Dr. h.c. Ulrich Hartmann strategy, and remuneration. Karel Vuursteen

Management Board Membership of statutory Membership of comparable supervisory boards supervisory bodies Prof. Dr. Ulrich Lehner1) E.ON AG, Ecolab Inc., USA, Chairman HSBC Trinkaus & Burkhardt AG, Novartis AG, Switzerland Born in 1946 Dr. Ing. h.c. F. Porsche AG Member since April 1, 1995 Dr. Jochen Krautter1) BASF Coatings AG Henkel Corp., USA (Chairman) Henkel Technologies Born in 1942 Member since June 15, 1992 Kasper Rorsted Cable & Wireless, Plc., UK, Vice-Chairman Ecolab Inc., USA, Human Resources/Logistics/ Henkel of America Inc., USA, Information Technologies/ Henkel Central Eastern Europe GmbH, Infrastructure Services Austria, Born in 1962 Henkel Norden AB, Sweden, Member since April 1, 2005 The Dial Corp., USA Alois Linder Henkel Consumer Adhesives Inc., USA Consumer and Craftsmen Adhesives (Chairman), Born in 1947 Henkel Corp., USA Member since January 1, 2002 Dr. Friedrich Stara The Dial Corp., USA (Chairman), Laundry & Home Care Wiener Städtische Allgemeine Born in 1949 Versicherung AG, Austria Member since July 1, 2005 Dr. Lothar Steinebach Ashwa Technologies Ltd., Saudi Arabia, Finance Henkel Adhesives Middle East E.C., Bahrain, Born in 1948 Henkel (China) Investment Co. Ltd., China, Member since July 1, 2003 Henkel & Cie AG, Switzerland, Henkel Consumer Goods Inc., USA (Chairman), Henkel Ltd., UK, Henkel of America Inc., USA (Chairman), Henkel Technologies Egypt SAE, Egypt, Saudi Arabian Adhesives Factory Co.,

Saudi Arabia, Financial Statements Consolidated Türk Henkel Kimya Sanayi ve Ticaret AS, Turkey Hans Van Bylen Henkel Belgium N.V., Belgium, Cosmetics/Toiletries Henkel Nederland B.V., Netherlands, Born in 1961 The Dial Corp., USA Member since July 1, 2005

1) Personally liable managing partner

Henkel Annual Report 2006 121 Further Information

Operating Management

Dr. Ramón Bacardit Bertrand Conquéret Norbert Koll Peter Ruiner Technologies Research Global Purchasing Cosmetics Region Germany/ Adhesives for Professionals/ Alain Bauwens Jean Fayolle Switzerland/Central Eastern Asia Paciﬁ c/MEA Home Care/MENA/ Technologies EMEA/ Europe/Russia/CIS/MENA Stefan Sudhoff Asia Paciﬁ c/ Latin America and Export SBU Body Care/Fragrances/ Central America Dr. Attilio Gatti Libor Kotlik Cosmetics Region South, Laundry & Home Care Technologies Marketing and Technologies Operations & West Europe/North and Wolfgang Beynio Product Development Supply Chain Latin America Finance/Controlling Dr. Wolfgang Gawrisch Andreas Lange Günter Thumser Dr. Andreas Bruns Research/Technology Laundry & Home Care Henkel Central Eastern Europe West Europe Infrastructure Services Enric Holzbacher Christian-André Weinberger Pierre Brusselmans Adhesives for Consumers/West Tina Müller Laundry Care Corporate Development Europe SBU Hair, Skin & Oral Care Peter Wroblowski Brad Casper Dirk-Stephan Koedijk Dr. Thomas Information Technologies Dial Corporation North America Human Resources Müller-Kirschbaum R&D/Technology/Supply Julian Colquitt Chain Laundry & Home Care Technologies North America At January 1, 2007

Management Circle I Worldwide

Giacomo Archi Pierre Gibaud Joris Merckx Dr. Matthias Schmidt Faruk Arig Dr. Karl W. Gladt David Minshaw Dr. Berthold Schreck Jan-Dirk Auris Ralf Grauel Dr. Clemens Mittelviefhaus Dr. Hans-Willi Schroiff Georg Baratta-Dragono Bartholomew Griffi n Scott Moffi tt Jens-Martin Schwaerzler Harald Bellm Peter Günther Eric Moley Dr. Johann Seif Francisco Beltran Rainer M. Haertel Juan Morcego Brian Shook Paul Berry Ferdinand Harrer Georg Müller Dr. Simone Siebeke Cedric Berthod Ludger Hazelaar Dr. Heinrich Müller Andrew Smith Amy Bloebaum Fridtjof Helemann Rolf Münch Bart Steenken Dr. Joachim Bolz Michael Hillman Julio Munoz-Kampff Dr. Walter Sterzel Robert Bossuyt Georg Hoebenstreit Liam Murphy Marco Swoboda Hanno Brenningmeyer Dr. Alois Hoeger Christoph Neufeldt Dr. Boris Tasche Daniel Brogan Jos Hubin Helmut Nuhn Richard Theiler Sergej Bykovskikh Dr. Stefan Huchler Joseph O'Brien John Tierney Marco Cassoli Dr. Hans-Georg Hundeck Michael Ogrinz Mitchell Tinnan Dundar Ciftcioglu Dr. Jochen Jacobs Michael Olosky Greg Tipsord Michael James Clarkson Dr. Joachim Jäckle Carlos Eduardo Orozco Thomas Tönnesmann Jürgen Convent Regina Jäger Dr. Uwe Over Patrick Trippel Susanne Cornelius Rainer Tschersig John Kahl Campbell Peacock Christian Twehues Paul de Bruecker Patrick Kaminski Jerry Perkins Ivan de Jonghe Peter Kardorff Thomas Perlitz Robert Uytdewillegen Hermann Deitzer Dr. Klaus Kirchmayr Norbert Pestka Tracy Van Bibber Serge Delobel Dr. Wolfgang Klauck Bruno Piacenza Amelie Vidal-Simi Dr. Alexander Ditze Carsten Knobel Jeffrey Piccolomini Dr. Vincenzo Vitelli Eric Dumez John Knudson Arnd Picker Ramon Viver Wolfgang Eichstaedt Nurierdem Kocak Michael Prange Dr. Rainer Vogel Dr. Horst Eierdanz Dr. Harald Köster Dr. Wolfgang Preuß Dr. Dirk Vollmerhaus Ashraf El Afi fi Peter Kohl Ernst Primosch Kim Walker Stephen J. Ellis Dr. Werner Krieger Dr. Volker Puchta Claus Weigandt Steven Essick Thomas-Gerd Kühn William Read Andreas Welsch Charles Evans Dr. Marcus Kuhnert Dr. Michael Reuter Klaus-Dieter Weyers Dr. Norbert Fedtke Luis Carlos Lacorte Robert Risse Dr. Jürgen Wichelhaus Thomas Feldbrügge Tom Linckens Gabriele Rusconi Dr. Hans-Christof Wilk Dr. Peter Florenz Sammy Loutfy Jean Baptiste Santoul Dr. Rudolf Wittgen Dr. Thomas Foerster Oliver Luckenbach Anavangot Satishkumar Holger Gerdes Dr. Carlo Mackrodt Wolfgang Schäufele Roberto Gianetti Dr. Klaus Marten Rolf Schlue Lutz Mehlhorn Aloys Schmeken At January 1, 2007

122 Henkel Annual Report 2006 Further Information

Financial Highlights by Quarter

in million euros 1st quarter 2nd quarter 3rd quarter 4th quarter 2005 2006 2005 2006 2005 2006 2005 2006 Sales Laundry & Home Care 957 1,009 1,012 1,026 1,086 1,050 1,033 1,032 Cosmetics/Toiletries 594 642 684 746 681 742 670 734 Consumer and Craftsmen Adhesives 371 448 427 498 481 536 463 495 Henkel Technologies 758 887 825 899 832 872 851 875 Corporate 57 62 61 61 60 60 71 66 Henkel Group 2,737 3,048 3,009 3,230 3,140 3,260 3,088 3,202 EBIT Laundry & Home Care 107 114 103 108 109 125 114 102 Cosmetics/Toiletries 68 74 84 95 80 89 89 101 Consumer and Craftsmen Adhesives 41 44 46 50 54 65 44 50 Henkel Technologies 78 90 92 137 86 74 89 69 Corporate –29 –27 –29 –31 –29 –32 –35 1 Henkel Group 265 295 296 359 300 321 301 323 Earnings before tax 226 261 271 332 267 298 278 285 Net earnings for the quarter 168 185 201 248 199 217 202 221 Earnings per preferred share in euros 1.16 1.27 1.38 1.70 1.36 1.47 1.41 1.54

Henkel Annual Report 2006 123 Further Information Further Information

Ten-Year Summary

in million euro 1997 1998 1999 2000 2001 2002 2003 2004 200419) 2005 2006 Sales 10,259 10,909 11,361 12,779 9,4106) 9,656 9,436 10,592 10,592 11,974 12,740 Operating profit (EBIT) 702 791 857 950 6026) 666 706 80018) 996 1,162 1,298 Earnings before tax 1,001 644 692 816 7348) 664 768 80818) 1,007 1,042 1,176 Net earnings 3203) 372 404 505 4767) 431 53012) 55118) 748 770 871 Earnings after minority interests 287 336 364 468 4378) 435 51913) 55018) 747 757 855 Earnings per preferred share (EPS) 3.764) 2.33 2.53 3.25 3.509) 3.06 3.6514) 3.8818) 5.24 5.31 5.98 Total assets 8,905 9,130 9,856 11,382 9,365 8,513 9,362 13,138 13,287 13,944 13,346 Non-current assets 5,040 5,164 5,504 6,295 5,490 4,927 4,723 7,400 7,989 9,065 8,664 Current assets (including deferred tax assets) 3,865 3,966 4,352 5,087 3,875 3,586 4,639 5,738 5,248 4,879 4,682 Debt 6,061 6,301 6,618 7,882 5,761 5,150 5,976 8,937 8,941 8,545 7,799 Shareholders’ equity 2,844 2,829 3,238 3,500 3,604 3,363 3,386 4,201 4,346 5,399 5,547 as % of total assets 31.9 31.0 32.9 30.8 38.5 39.5 36.2 32.0 32.7 38.7 41.6 Net return on sales (%)1) 5.6 3.4 3.6 4.0 3.611) 4.5 5.615) 5.1218) 7.06 6.43 6.84 Return on equity (%)2) 13.15) 13.1 14.3 15.6 13.68) 12.0 15.816) 16.118) 17.2 17.7 16.1 Dividend per ordinary share in euros 0.69 0.79 0.87 1.06 1.06 1.06 1.14 1.24 1.24 1.30 1.4410) Dividend per preferred share in euros 0.74 0.84 0.93 1.12 1.12 1.12 1.20 1.30 1.30 1.36 1.5010) Total dividends 104 119 131 157 156 156 167 185 185 193 21410) Capital expenditures (including financial assets) 2,127 979 746 1,359 6646) 484 58017) 4,628 4,678 1,119 897 Investment ratio as % of sales 20.7 9.0 6.6 10.6 5.3 5.1 6.1 43.7 43.7 9.3 7.0 Research and development costs 238 250 279 320 2557) 259 257 272 272 324 340 Number of employees (annual average) 53,753 56,291 56,620 60,475 47,3626) 47,203 48,328 49,947 49,947 51,724 51,716 Germany 15,138 15,257 15,065 15,408 11,1216) 10,944 10,767 10,488 10,488 10,264 9,995 Abroad 38,615 41,034 41,555 45,067 36,2416) 36,259 37,561 39,459 39,459 41,460 41,721

1) net earnings ÷ sales 2) net earnings ÷ average equity (from 1997 equity at beginning of year) 3) 576 million euros including gain from sale of GFC shareholding (Degussa) 4) excluding gain from sale of GFC shareholding, preferred share: 1.99 euros 5) excluding gain from sale of GFC shareholding (Degussa) 6) continuing businesses 7) 541 million euros including net gain from exceptional items 8) before exceptional items 9) after the sale of Cognis and Henkel-Ecolab: 3.05 euros 10) proposed 11) net earnings ÷ sales of 13,060 million euros 12) net earnings excluding Clorox share buy-back: 500 million euros 13) earnings after minority interests excluding Clorox share buy-back: 489 million euros 14) before exceptional items in 2003 – sale of participation in Wella, Extended Restructuring measures and Clorox share buy-back: 3.47 euros 15) net return on sales excluding Clorox share buy-back: 5.3 percent 16) return on equity excluding Clorox share buy-back: 14.9 percent 17) excluding Wella proceeds of 280 million euros 18) before exceptional items 19) restated and comparable

124 Henkel Annual Report 2006 Business Sectors

Business Sectors at a Glance Credits Calendar

Annual Report 2006 Henkel Group: Financial Highlights Henkel

1) proposed pp = percentage points

2006 sales by business sector 2006 EBIT by business sector1)

Corporate 2 % Laundry & Laundry & Home Care 32 % Home Care 32 % Henkel Henkel Technologies 28 % Technologies 27 %

Consumer Consumer and Craftsmen Cosmetics/ and Craftsmen Cosmetics/ Adhesives 16 % Toiletries 22 % Adhesives 15 % Toiletries 26 %

1) excluding Corporate

2006 sales by region 2006 EBIT by region1) Quality from Europe/Africa/ Europe/Africa/ Middle East 63 % Middle East 69 %

Corporate 2 % Asia-Pacific 8 % North America 22 % Asia-Pacific 5 % North America 23 % Latin America 5 % Latin America 3 %

1) excluding Corporate